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Supplemental Funding for Defense Contractors During COVID-19 Highlights Fragility of Defense Industrial Base

Ken Wetzel, Wednesday, September 30, 2020
 
On September 22, the Washington Post published an article stating the Pentagon’s use of  $1 billion appropriated to the Defense Production Act Title III program as part of the CARES Act was “redirected to firms that weren’t originally targeted for assistance.” The article implied that DoD mismanaged these funds by using them as “bailouts” for defense contractors rather than for Congress’ intended purpose of scaling up manufacturing for personal protective equipment (PPE). The DoD released a response last week.
 
Since the article was published, there has been heightened criticism and scrutiny of the DoD’s use of DPA Title III funds appropriated in the CARES Act. Some have called for the DoD Inspector General to investigate the use of the funds by the DoD.
 
Although it is certainly true that other industries require support during these unprecedented events, it is also of the utmost importance that the Department utilize its funding to protect the resiliency of its industrial base. Ensuring defense contractors are able to successfully navigate an unprecedented crisis such as COVID-19 is directly related to the United States’ national security. Many defense contractors that provide essential DoD materiel have faced significant business challenges due to economic decline. This is especially true for sub-tier suppliers. In many cases, revenue generated from DoD contracts is a small contributor to their overall financial health.
 
As the September 2018 report on the defense industrial base and its supply chain resiliency revealed, the defense industrial base is quite fragile. Due to a decrease in domestic manufacturing, increased reliance on foreign imports, movement towards sole source providers for critical materials, continuing resolutions from Congress, the government’s procurement practices, and more, the domestic industrial base is weak in a number of key areas. Ms. Ellen Lord, the Under Secretary of Defense for Acquisition and Sustainment, has made the relationship between economic stability and national security clear to the public on more than one occasion.
 
Our nation’s warfighters depend on highly specialized equipment that should be manufactured domestically when possible to ensure capability overmatch compared to near peer adversaries. Allowing the US industrial base to become more vulnerable due to a global pandemic could open up more opportunities for mergers and acquisition by foreign entities that are less interested in supplying the DoD or cause these companies to shutter. The manufacturing capacity and capability needed to make the DoD’s equipment cannot be easily or cheaply reconstituted. Perhaps more importantly, the work force’s skill and technical expertise could also atrophy, thus further steepening the lead time to effectively produce important defense items.
 
If the United States government did not make investments into defense manufacturers, it risked losing access to domestically produced military critical equipment. For example, while it may be unlikely that the United States would lose the capability to assemble fighter aircraft, it may be the case that it loses the capability to produce important components and subsystems within that system, leaving the government less desirable options such as securing these items from overseas suppliers or investing to reconstitute the manufacturing capability and capacity at another entity. Both of these are potentially higher risk and more expensive than proactively strengthening the industrial base.
 
While individual contract actions made with DPA Title III funding may be open to criticism, utilizing these funds to invest in the domestic industrial base was a necessary action. Without it, the United States’ national security could have been compromised and the nation may have had to spend more money redeveloping its domestic capability for certain products. Going forward, it would be prudent for the DoD and Congress to preempt these industrial base shortfalls that occur during market disruptions by increasing its investments in industrial base and manufacturing technology programs to develop a truly robust and resilient defense industrial base before a crisis deems it necessary.
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