BREAKING: Report sends ‘wake-up call’ for health of defense industrial base

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The ongoing COVID-19 pandemic, cybersecurity attacks and supply chain disruptions have weakened the already waning U.S. defense industrial base, according to a new report published Feb. 2.

In the annual report —« Vital Signs 2022: The Health and Readiness of the Defense Industrial Base– the defense sector received an overall “unsatisfactory, failing” rating of 69. This is the first time the DIB has not received a passing rating since Vital signs was first released in 2020.

Vital signs is an annual study published by the National Defense Industrial Association in partnership with decision science company Govini. NDIA is also publisher of National Defense.

“While technically one point short of the passing grade, there are specific signs that give rise to real concern,” the report read. The report’s final score of 69 was three points lower than last year’s score of 72.

“This failing score is a wake-up call to all policy makers on Capitol Hill and in the executive branch and the [Department of Defense] who care about national security and this nation,” NDIA President and CEO Hawk Carlisle said at a press conference unveiling the report.

Although Carlisle acknowledged that disruptions to the U.S. economy caused by COVID-19 — such as a shrinking workforce, inflation and supply chain shortages — have played a role in the score, he also pointed to other challenges facing the industrial base.

“A lot of these challenges existed before COVID. The pandemic has highlighted and accelerated these challenges,” Carlisle said. “Russia’s aggressive military buildup on the Ukrainian border and the People’s Republic of China’s rapid military modernization efforts remind us that our industry’s job of providing superior products and services to the armed forces so that they can compete and win in all areas of war can never be taken for granted.

Vital signs analyzed eight different areas that shape the operating environment of the US defense industrial base: demand for defense goods and services; cost and availability of production inputs; defense industry innovation; supply chain performance; market competition; industrial Security; political and regulatory activity; and production capacity and rapid reaction capacity.

The researchers analyzed more than 50 publicly available statistical indicators that serve as empirical proxies, converted them into an index score scaled from 0 to 100, and evaluated three years of scores for each. With the exception of data from an August survey of NDIA members, the Vital signs The study’s datasets are “lagging indicators” that went live before the start of the United States’ nationwide COVID-19 inoculation effort, the report notes.

“This data was pulled when we were at the one-year point in the COVID crisis, so this is the first year that we’ve seen the impacts of COVID,” said Wes Hallman, senior vice president of strategy. and NDIA policy.

This year, five of the eight areas analyzed received a failing grade, according to the report. This indicates that the defense industrial base is experiencing the negative impacts of COVID-19 just like other industries, it reads.

The pandemic played a significant role in the 8-point drop in vital sign “supply chain performance,” which scored a failing 63.

“This decline reflects significant turbulence introduced to the economy during the first year of the COVID-19 pandemic,” the researchers noted in the report. “We expect next year’s report to reflect even greater supply chain challenges brought on by the pandemic.”

Hallman said COVID-19 has brought the supply chain problem to light. The decline is attributed to a decrease in the average business cash conversion cycle, which itself fell 32 points from a year ago, according to the report.

“The 36-point drop was specifically aimed at supply chains through this financial lens,” said Robbie Van Steenburg, regulatory policy partner at NDIA. “Looking at the cash conversion cycle – how efficiently do companies pick something, buy the resources they need, turn it into a product, and sell it?”

The ‘generating capacity and surge preparedness’ sign demonstrated one of the biggest declines this year Vital signs ratio, falling from 67 to 52 in 2021. This is explained by a sharp decline in production efficiency, which helps determine the ability of the economy to cope with an increase in defense related demand, according to the report.

“The need for increased defense production often arises suddenly, leaving defense contractors with little time to increase production to meet an increase in demand for their goods, services or materials,” the report said.

The researchers found that the failure score of 67 “Cost and availability of production inputs” can also be attributed to COVID-19, as the dense sector is highly dependent on the cost and availability of skilled labor , raw materials and intermediate goods and services.

The sign “cost and availability of production inputs” saw the biggest drop in 2021 due to pandemic disruptions, according to the report.

“Defense contractors consume intermediate goods and intermediate services when performing their defense contracts, and rising costs may negatively affect production capacity,” the report said. “Changes in production input costs may require producers to adapt their production plans by altering their unit cost structure of end products, changing production volumes, or passing on additional costs to the government customer.”

With a score of 50, “industrial security” obtains the lowest score for the second consecutive year. It has continued as a thorn in the side of the industry as intellectual property theft, acts of economic espionage and ransomware hacks continue. Although the score rose slightly in 2021 — by just one point — the report noted that this improvement was due to a lack of new FBI investigations into intellectual property rights violations that come after years of enforcement. ‘law application.

New cybersecurity vulnerabilities have increased 263% since 2016, indicating that the threat itself must be addressed adaptively, Hallman said.

“You can never solve this problem, by itself it’s not going to go away,” he said. “It’s something you mitigate by having a system that incentivizes constant adaptation to the threat as it arises.”

The score for “policy and regulatory conditions” dropped four points, receiving an overall score of 72. Researchers analyzed public opinion on defense spending, the congressional budgeting process, and regulatory burden to assess this domain.

Of the three, public opinion received the lowest score. A poll of American adults conducted by the Gallup organization suggests that the pandemic has raised some public anxiety about defense spending, the report said.

In early 2020, before the pandemic hit, 50% of respondents thought defense spending was “about right”, which marked a 7% increase from 43% in 2019, the report said. . “This 2020 result of [50 percent] is the highest percentage of “about right” answers for this question since Gallup started asking it more than 52 years ago,” the report said.

“Innovation in the Defense Industry” remained stagnant, again receiving an overall rating of 69 from researchers. Between 2011 and 2016, US government funding for research and development projects fell 12% in absolute terms, according to the report. “During the same period, Russia and China increased public investment in research and development by 13% and 56%, respectively,” he added.

Dr. Mark Lewis, executive director of the NDIA’s Institute for Emerging Technologies, said the decline in basic research the study reported was troubling.

“It’s eating our seed corn,” he said. “While we talk about future emerging technologies, we won’t have the next set of emerging technologies if we don’t invest in the basic research that will get us there.”

Despite the challenges faced by the DIB, the report highlighted some positive aspects. “Demand for defense goods and services” received the highest score of 94, also increasing by 6 points. This stems from an 8% increase in contractual bonds issued by the Department of Defense, according to the report.

Foreign military sales also contributed to the positive score, the researchers noted. “Foreign military sales saw a significant increase from 2019 to 2020, benefiting from a more [30 percent] increased sales totaling more than $50 billion, which represents a significant change from recent years when foreign military sales were approximately $30 billion,” the report said.

Additionally, the “market competition” sign also received a high score of 88 – the same as last year, according to the document.

“This high rating was driven by several high-scoring factors, including a low level of market concentration for the total contract award, the low share of the total contract award received by foreign contractors, and a high level of capital expenditure in the DIB,” the report said. noted.

Topics: Department of Defense