Redesigning Defense: Planning the

Transition to the Future U.S. Defense

Industrial Base

July 1991

OTA-ISC-500

NTIS order #PB91-220012
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Redesigning Defense: Planning the

Transition to the Future U.S. Defense Industrial Base, OTA-ISC-500 (Washington, DC: U.S.

Government Printing Office, July 1991).

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
Foreword

The defense technology and industrial base (DTIB) is a crucial element of U.S. military

strength because it provides the capability to develop, produce, and support military systems

in peacetime and to respond to additional military requirements in crisis or war. The recent

conflict in the Persian Gulf once again demonstrated the vital importance of the DTIB, even

as recent changes in the international security environment have raised fundamental questions

about its future size and character.

This report is the second publication responding to a request by several congressional

committees and individual Members of Congress for OTA to assess what form the future base

should take and what government policies can best facilitate the transition from the base’s cold

war configuration. A background paper published in February 1991, Adjusting to a New

Security Environment, defined the DTIB, discussed how the United States has used its

technological and industrial strength to assure its national security in the past, and outlined

some of the challenges currently facing the Nation. This Report examines emerging U.S.

national security requirements, surveys the current conditions and trends in the DTIB, and

proposes some desirable characteristics for the future base. The report concludes with a

discussion of the broad strategic choices and tactical decisions that must be considered as the

Nation moves to this future base.

The objectives of the report are to provide a framework for the debate over the size and

character of the future DTIB, and to assist Congress in selecting criteria for making the

difficult policy and budget choices that will be required to facilitate the transition. The

industrial base characteristics proposed in this report differ significantly from those of the

current base. Probably the most fundamental difference is the separation of the R&D process

from the expectation of major production runs. To maintain both technological development

and manufacturing skills in a period of reduced defense budgets, OTA describes a process of

continuous competitive prototyping that tests new concepts, incorporates new technology into

fielded systems, but results in the manufacture and deployment of new systems only when

required. These steps, and others examined in the Report, carry risks to both the R&D and

manufacturing elements of the base. However, the new fiscal and security realities facing the

Nation force difficult tradeoffs that include such risks. It is also clear that managing this

change will require improved and better-integrated management in the future.

The final report of this assessment, to be delivered in the spring of 1992, will address

specific policy options arising from the strategic choices and tactical decisions discussed here.

In undertaking this report, OTA sought information and advice from a broad spectrum

of knowledgeable individuals and organizations whose contributions are gratefully acknowledged. As with all OTA studies, the content of the report is the sole responsibility of the Office

of Technology Assessment and does not necessarily represent the views of our advisers and

reviewers.

~ Director

. . . Ill
Redesigning Defense: Planning the Transition to the Future

U.S. Defense Industrial Base—Advisory Panel

Walter B. Slocombe, Chair

Caplin & Drysdale Chartered

Richard Bohlen

Senior Vice President, Operations

Rockwell International Corp.

Robert Calaway

President

Resource Management International, Inc.

Gordon Corlew

Vice President, Production

AIL Systems, Inc.

Jacques S. Gansler

Senior Vice President

The Analytic Sciences Corp.

Julius Harwood

Consultant

William W. Kaufmann

Professor

John F. Kennedy School of Government

Harvard University

Gen. P.X. Kelley, USMC (Ret.)

James L. Koontz

President & CEO

Kingsbury Machine Tool Corp.

Thomas L. McNaugher

Senior Fellow

The Brookings Institution

William J. Perry

Chairman & CEO

Technology, Strategies and Alliances

Donald W. Putnam

Corporate Director

Contracts and Technical Analysis

General Dynamics Corp.

Jack Ruina

Professor of Electrical Engineering

Center for International Studies

Massachusetts Institute of Technology

Howard D. Samuel

President

Industrial Union Department AFL-CIO

Wickham Skinner

Professor Emeritus

Business Administration

Harvard University

Gen. William Y. Smith, USAF (Ret.)

James Solberg

Professor

Engineering Research Center

Purdue University

Leonard Sullivan

Consultant

System Planning Corp.

William McNeill

Professor Emeritus

Adm. Harry Train USN (Ret.)

Department of History

Division Manager

University of Chicago

Strategic Research and Management

Services Division

John Mearsheimer Science Application International Corp.

chairman

Department of Political Science

Gen. John W. Vessey, Jr. USA (Ret.)

University of Chicago Albert Wheelon

Joseph Nye

Consultant

Director

Center for International Affairs

Harvard University

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the

report and the accuracy of its contents.
OTA Project Staff—Redesigning Defense: Planning the Transition to the

Future U.S. Defense Industrial Base

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Alan Shaw, International Security and Commerce Program Manager

Jack H. Nunn, Project Director

Ivan Oelrich

Jonathan B. Tucker

Administrative Staff

Jacqueline R. Boykin

Madeline Gross

Louise Staley

Contractors

Don Fowler

Arnold Levine

Henry S. Liers

David Soergel

Paul E. Taibl

Frederick Williams

The Analytic Sciences Corp.
Conventional Forces Workshop, Aug. 7, 1990

Richard Barnet

Senior Fellow

Institute of Policy Studies

Richard Betts

Senior Fellow

Massachusetts Institute of Technology

Stephen Biddle

Research Staff Member

Institute for Defense Analyses

Seymour Deitchman

Senior Research Associate

Institute for Defense Analyses

Col. Marvin Floom, USMC

Warfighting Center

Ivan Oelrich, Chair

Office of Technology Assessment

Robert Johnson

Senior Fellow

National Planning Association

Gen. Frederick Kroesen

USA (ret.)

Barry Pavel

Consultant

Princeton University

Barry Posen

Associate Professor

Massachusetts Institute of Technology

Col. John Warden

Headquarters, USAF

The Pentagon

Randall Forsberg

Executive Director

Institute for Defense and Disarmament Studies

Defense Industrial Base Data Workshop, Dec. 17, 1990

Jack Nunn, Chair

Office of Technology Assessment

Michael Austin

Chief

Mobilization Resources Requirements Division

Federal Emergency Management Agency

William Brown

Branch Chief for Information Systems & Operations

AFSC/EMNS

Wright-Patterson Air Force Base

Dee Bumbera

Fellow

Office of Senator Jeff Bingaman

United States Senate

Lt. Col. Lawrence Cardinal

Defense Communications Agency

JDSSC/JM

The Pentagon

Glenn Coplan

Office of Energy Emergency Operations

U.S. Department of Energy

John DeBreuil

Director

Office of Industrial Base Assessment

Office of the Secretary of Defense

Dan Dennison

program Analyst

Office of Industrial Base Assessment

Office of the Secretary of Defense

Ronald Early

Supervisory Economist

Macro-Economic Analysis

Energy Information Administration

Robert Fabric

Chief, Production Policy Branch

Headquarters

Defense Logistics Agency

Philip P. Foley

Senior Industrial Specialist

Philadelphia Naval Shipyard

Col. Joseph Goodbody

JCS-J4

LPD/MO&PB

The Pentagon

John W. Gowens

Division Chief

Communication Network Systems Division

U.S. Army Institute for Research Management

Information Communication and Computer Sciences

vi
Robert B. Grant

Deputy Director

Office of Policy Analysis

U.S. Department of Commerce

Commander Bernard Grover

Office of Industrial Base Assessment

Office of the Secretary of Defense

Melissa Houghton

University of Maryland

Henry S. Liers

Technical Consultant

Joseph Muckerman

Director for Emergency Planning

ODUSD(SP)/EP

The Pentagon

Robert Nichol

HQDA (ODCSLOG)

The Pentagon

John Petrone

Chief, Industrial Preparedness Division

Industrial Engineering Activity

Rock Island Arsenal

Larry Salkin

Senior Policy Specialist

Mobilization Assessment Division

Federal Emergency Management Agency

Richard Samans

Legislative Assistant

Senator Donald Riegle

United States Senate

James Thomason

Research Staff Member

Institute for Defense Analyses

Observers:

Hugh Bradley

Defense Logistics Agency

Michael Chinworth

Contractor

John Crabill (AFSC/EMNS)

Wright Patterson Air Force Base

Judith Philipson

Contractor

John Richards

Deputy Assistant Secretary

Office of Industrial Resource Administration

U.S. Department of Commerce

vii
Contents

Page

Chapter 1. Summary, Major Findings, and Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chapter 2. Threats, Forces, and Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 3. Structure of the Current Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter 4. Trends and Problems in the Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Chapter 5. Framing the Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Appendix A. The North American Defense Industrial Base:

Canadian and Mexican Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

Appendix B. Industrial Base Models and Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

. . . W/l
Chapter 1

Summary, Major Findings, and

Policy Issues
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,.,..,.,*.....**..*..*., 3

ORGANIZATION OF THIS REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

FINDINGS

. . . . . . . . . . .

... ... ... ... ..*. ... ... ... ... ... ... ... .+. o.. .$$e*. **@ G**. *.*m***. *o *e*..* 6

Changes in the Security Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 6

Desirable Characteristics of the Future Base . . . . . . . . . . . . . . . . . . . .,, . . + . ., . ., *.,*,.+. 8

Broad Strategic Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . ., + ., . .,,.,..,. 9

Tactical Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ISSUES FOR CONGRESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Box

Box Page

l-A. Defense Survey Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 6

Figures

Figure Page

1-1. U.S. Defense Spending as a Percent of GNP . ....................,..,.,,.*,**,** 4

1-2. Armored Vehicle Production Projected Through 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1-3. Dual-Track Prototyping Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Tables

Table Page

1-1. Characteristics of Future U.S. Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1-2. Desirable Characteristics of the Future Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1-3. Options for Change in the DTIB . . . . . . . . . . . . . . . . .

. . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Chapter 1

Summary, Major Findings, and Policy Issues

INTRODUCTION

Changes in the international security environment

present the United States with some far-reaching

decisions about the size and character of the

Nation’s future armed forces and the defense technology and industrial base (DTIB) supporting those

forces. The DTIB is the focus of this report. A crucial

element of U.S. military power, the base has two

principal functions:

1. developing, producing, and supporting military systems in peacetime; and

2. responding to increased military requirements

in crisis or war.

The deployment and support of U.S. forces in the

Persian Gulf and the performance of U.S. weapon

systems in Operation Desert Storm provided some

indication of the ability of the current DTIB--built

up over decades of cold-war spending-to meet the

Nation’s security needs. But a key question facing

Congress is how to retain the technology and

industrial capabilities essential for the defense of the

Nation and its interests with much reduced defense

budgets. This problem is extremely complex, requiring difficult choices involving tens of thousands of

skilled jobs and major shifts in defense spending.

Although the consequences of this restructuring will

be felt more strongly in some States and congressional districts than in others, the transition to the

future DTIB can be expected to generate considerable public debate. The purpose of this report is to

provide a framework for that debate, enabling

Congress to look beyond the immediate political

concerns of individual districts and States to the

national security requirements of the Nation as a

whole.

The DTIB is the combination of people, institutions, technological know-how, and facilities used to

design, develop, manufacture, and maintain the

weapons and supporting defense equipment needed

to meet U.S. national security objectives.l The base

consists of three broad components: a research and

development component, a production component,

and a maintenance and repair component, each of

which includes private- and public-sector employees and facilities. The base can also be divided into

three tiers: prime contractors, subcontractors, and

parts suppliers. While the DTIB is usually thought of

as an independent entity, it is in fact a part of the

larger civilian technology and industrial base and is

increasingly international.

Since 1950, the size and structure of the DTIB

have been shaped primarily by the demands of

containing the Soviet military threat. While the

sweeping changes in the Soviet Union and Eastern

Europe provide an opportunity to reduce U.S.

defense spending and redirect some technological

and industrial resources to meet other vital needs,

there is still considerable uncertainty about the

durability of the positive changes in the Soviet

Union and the nature of other potential threats. The

complexity of the current security environment was

illustrated by the administration’s 1992 defense

budget request, which supported a smaller, post-cold

war military establishment even as the United States

and its coalition partners were engaged in the war to

liberate Kuwait.

There appears to be consensus among government

policymakers that the United States will remain

globally engaged and must retain significant military forces and the means to arm and support those

forces. Yet it is equally clear that the defense budget

will be cut substantially. Overall defense spending is

expected to decline from a peak of 6.4 percent of

Gross National Product (GNP) in 1985 to about 3.8

percent of GNP in 1996, the smallest proportion

since before World War II (see figure l-l). At the

same time, procurement in real terms is projected to

fall almost 50 percent between fiscal years 1985 and

1996, from $123.9 billion to $64.3 billion (both

figures in 1992 dollars). Between 1990 and 1993,

budget authority for aviation is projected to decline

by 23 percent, shipbuilding by 26 percent, and

weapons and tracked vehicles by about 77 percent.2

While production of munitions and other consumables may increase temporarily to replenish stocks

W.S. Conpess, offIce of ‘rkchnoIog ASStXILIenL Adjusting to a New Security Environment: The Defense Technology ad Itimm-al Base

ChaZlenge-Background Paper, OTA-BP-ISC-79 (Washingto~ DC: U.S. Government Printing Office, February 1991).

zst~hen A. C@ An@is CJf the FY 1992-93 Defense Budget Request (Wishkgtonj DC: Defense Budget fiojwt, Feb. 1991), @bles 7 md 8.

–3–
4 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Figure 1-1—U.S. Defense Spending as a

Percent of GNP

1910 20 30 40 50 60 70 80 90

Year

SOURCE: Budget of the Udted States Government, Fisca/ Year 7992

(Washington, DC: U.S. Government Printing Office, 1991), part

Seven, historical tables, table 3.1; and Stephen A. Cain,

Analysis of the FY 1992-93 Defense Budget Request (Washington, DC: Defense Budget Projeet, February 1991), table 15.

consumed during the Gulf War, procurement of

major weapon platforms will decline sharply over

the next decade because of large existing inventories

and Shrinking force. “

Direct funding for defense research and development (R&D) is expected to fall 23 percent.3 This

latter figure substantially understates the actual total

reduction in defense R&D funding that is likely to

occur, however, since much private-sector R&D is

linked to procurement levels, which are also falling

rapidly.4

The projected changes in the production and R&D

budgets will have profound effects on many defense

sectors. In addition to overall reductions, there will

be a reallocation of funding priorities as the Services

end current programs and move ahead with modernization. The reduced demand for weapon platforms

will result in a production “trough’ over the next

5 years in defense sectors such as armored vehicles

(see figure 1-2), followed by longer intervals between procurement cycles. As a result, there maybe

gaps between the end of several current programs

and the start of production of next-generation

systems. Decisions about the DTIB made over the

next few years will determine the survival of some

defense firms and government organizations. More

importantly, these decisions will determine in large

measure the Nation’s ability to develop and deploy

Figure 1-2—Armored Vehicle Production Projected

2’OOo~

1985 1990 1995 2000 2005

u Ml tanks = Bradleys

= Proposed Bradley _ Next-generation tank

foreign military Sales

NOTE: Ml tank figures include proposed foreign military sales to Saudi

Arabia and Egypt, with Egyptian coproduction.

SOURCE: U.S. Department of the Army, May 1991.

advanced military weapons systems in the opening

decades of the next century. Once plants and

laboratories are closed and their personnel scattered,

they can take years to reconstitute; the unique skills

embodied in the design and engineering teams that

conceive of and build weapons like the F-15 fighter

and the Tomahawk cruise missile are neither easily

maintained nor quickly replaced.

An example of the difficult choices facing Congress is whether the United States should cease

production of Ml tanks and Bradley Fighting

Vehicles. The production trough shown in figure 1-2

makes it clear that the Nation must decide which

armored vehicle R&D and production capabilities it

should attempt to preserve, and how these capabilities (people, facilities, organizations, and subtier

producers) might be maintained with limited or no

new production. Possible strategies include terminating production and concentrating on R&D, increasing foreign sales, continuing procurement for

U.S. forces, and upgrading older Ml tanks and

Bradleys. A host of other weapon systems raise

similar choices about preserving defense R&D and

production capabilities.

In making such choices, Congress should recognize that technology is changing so rapidly that by

the time a major new threat arises, totally new types

31bid., table 9.

ADef~~e ~n~actor~ ~ve.st ~ R&D ~~~y ~oU@ govement-mimbm~ ~dqendent Research and Development (IR&D), which k tied to

ongoing procurement contracts, or other corporate funds in the expectation of winning a production contract.
Chapter 1--Summary, Major Findings, and Policy Issues ● 5

of weapons and defense manufacturing capabilities

may be required. Although those charged with

fighting a potential war always worry about not

having the most capable weapons on hand, weapons

eventually become obsolete. Thus, a period free

from an immediate large military threat allows

opportunities to investigate new weapon concepts

and potentially to leapfrog a generation of systems.

Between World Wars I and II, for example, the

Army’s DTIB strategy for armored vehicles concentrated on component development and the design

and limited prototyping of new tank models, which

were subsequently produced during World War 11.5

Some aircraft designers argue that the United States

could maintain its performance edge in fighter

aircraft with a similar emphasis on prototype development, combined with limited, intermittent production to modernize forces when necessary.

While the DTIB has produced some outstanding

weapon systems, as demonstrated in the Gulf War,

it also has a number of serious weaknesses that will

affect its ability to meet national goals of peacetime

production and crisis response. Numerous studies

conducted over the past decade have detailed these

weaknesses, including the high cost of weapon

programs, growing dependence on foreign sources

for critical components, and a shrinking number of

subcontractors doing defense business. The causes

of these adverse trends are two-fold: regulatory

controls that increase the cost of conducting defense

business and discourage many firms from participating in defense efforts; and the lack of a national

defense technology and industrial strategy and

predictable funding levels that would enable both

private firms and government organizations to

prepare for the future.

Firms are responding to current and anticipated

budget reductions by attempting to increase arms

sales abroad, reducing facilities, cutting investment

in new technology and physical plant, eliminating

personnel, and, in some cases, attempting to diversify into the civil sector. The ad hoc nature of the

reductions to date has further exacerbated the overall

problems of the DTIB.

There has been a tendency to treat the privatesector portion of the base like any other private

business, with contracts bid competitively and

working capital provided by loans or equity investments. In fact, this element of the DTIB does not

operate in a free market. The government is the only

customer for defense products and regulates profits,

production processes, product design, and a host of

other factors. This monopsony (single-customer)

relationship gives the government considerable power.

6 In the Past, the government used its power to

entice firms into the defense business by reducing

financial risks and providing guaranteed profits.

Beginning in the 1980’s, however, the government

focused on expanding competition while limiting

potential profits, thereby increasing business risk.

To obtain a better grasp of the changes that are

occurring in the DTIB and what congressional

actions, if any, might be called for, Congress asked

the Office of Technology Assessment (OTA) to

examine the Nation’s defense technology and industrial needs in the emerging security environment and

to suggest options for moving to a smaller and more

efficient DTIB that can meet those needs. The

objectives of this report are as follows:

1. to survey ongoing changes in the international

security environment that will affect DTIB

requirements,

2. to describe the current condition and trends in

the DTIB,

3. to identify the desirable characteristics of the

future DTIB, and

4. to sketch out broad alternative strategies available to the Nation for moving to the future base.

A separate report, scheduled for release in the

spring of 1992, will explore in greater detail specific

policy options to support these strategies.7

5Ric~d M. &go~cficz,Amor mew York NY: Fr~erickA. pr~ger, 1960); and R. P. HunnicuL Firepower ~oVato, CA: presidio Pres$ 1988)”

%Mice of the Under Secretary of Defense for Acquisition, Final Report of the Defense Science Board 1988 Summer Study, The Defense Indusm”al

and Technology Base (Washington DC: October 1988), p. 12.

T~ ~wssmmtisp~of a broadereffort t. iden~ trends in the U.S. technology ~d industrid b= ~d ~~e U.S. Po~cY oPtiomo A comP~on

OZ4 assessment, Technology Oppotiunz”tiesfor Econonu”c Conversion, is ongoing in the Industry, ‘IkcImology, and Employment Program. Other nxent

rdated OTA reports include: U.S. Congress, Offlce of ExYmology AssesrnenL Holding the Edge: Maintaining the Defense Technology Base,

OX4-ISC-420 (Washington DC: U.S. Government Printing Oftlce, April 1989); U.S. Congress, (lfflce of ‘Rchnology Assessment, The Defense

Technology Base: Introduction and Ovew”ew, OTA-ISC-374 (Washingto~ DC: U.S. Government Printing Office, March 1988); U.S. Congress, tilce

of lkchnology Assessmen4 Global Arms Trade: Commerce in Advanced Military Technology and Weapons, OT4-ISC-460 (Washington DC: U.S.

Government Printing 0ft3ce, June 1991); and U.S. Congress, ~lce of Technology Assessment Making Things Better: Competing in Manufaczzaing,

OTA-ITE-443 (Washingto~ DC: U.S. Government Printing OflIce, February 1990).
6 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

ORGANIZATION OF THIS

REPORT

The report is organized into five chapters and two

appendices. This chapter summarizes key findings

and policy issues. Chapter 2 outlines potential

threats to the United States and its allies, the future

U.S. force structure that may be developed to

counter these threats, and the implications of alternative force structures for the DTIB. Chapter 3 surveys

the structure and current condition of the DTIB, and

chapter 4 examines trends and problems in the base,

including strategies of defense companies for responding to continuing budget cuts. Chapter 5

outlines some desirable characteristics of the future

DTIB and discusses alternative national strategies

for moving to a base that is capable of meeting the

Nation’s long-term security needs. Appendix A

describes the integrated U.S. and Canadian defense

industrial complex, known as the North American

Defense Industrial Base, and explores some of the

implications for the DTIB of increased economic

integration with Mexico. Appendix B contains a

brief discussion of defense industrial databases and

industrial base analytical models.

As part of this study, the OTA assessment team

sent surveys to several hundred defense industry

executives requesting their views on changes in the

DTIB and actions being taken or that could be taken

to ensure a viable future base (see box l-A).

Information from the survey, as well as from

subsequent interviews with company and government personnel, is incorporated in the text of this

report. In addition, selected survey observations

appear in boxes marked ‘OTA DEFENSE INDUSTRY SURVEY. ‘‘

FINDINGS

Changes in the Security Environment

The threat of a short-warning Warsaw Pact

military attack against Western Europe has disappeared. The integrated command structure of the

Warsaw Treaty Organization was dissolved on April

1, 1991, and Soviet armies that only a few years ago

were deployed in the heart of Europe are now

withdrawing to the borders of the U.S.S.R. These

changes have transformed the former threat of a

short-warning conventional attack into a longwarning threat. A Soviet attack on NATO’s central

front would require the Soviet Union to reconstitute

OTA DEFENSE INDUSTRY

SURVEY

Box l-A—Defense Survey Approach

The OTA Defense Industry Survey solicited

industry views on three main topics:

1. the size and composition of the future

defense technology and industrial base

(DTIB) in the year 2000,

2. how the transition to the future base ought

to take place, and

3. how the future base ought to be managed.

Respondents were provided with the definition of

the DTIB and the force structure forecasts used by

The survey was divided into three areas:

1) General Observations on the Defense Technology and Industrial Base (soliciting general information on size of respondents’ firms, estimates of

future Us. defense budget changes and corporate

responses, and challenges facing the firms);

2) Assessments of Specific Policies and Problems

(soliciting views on government acquisition regulations, competition, and special programs such as

Manufacturing Technology); and 3) New Ideas

(soliciting industry’s suggestions for the restructuring of acquisition, the management of research and

development, and manufacturing). Survey questions were designed to allow respondents to provide

their views m essay format.

The American Defense Preparedness Association (ADPA) and the National Security Industrial

Association (NSIA) assisted OTA in reaching a

wide range of industry. The survey was sent to

members of the Manufacturing Management Committee and Procurement Committee of the NSIA

and to the general membership of the ADPA. The

OTA assessment team appreciates the assistance of

ADPA and NSIA in reaching industry. The associations, of course, had no role in developing the

conclusions of this report. In cases where several

executives from the same corporation received the

survey, many corporations chose to consolidate

their replies. While the response rate cannot,

therefore, be calculated exactly, overall it exceeded

25 percent. The OTA assessment team was impressed by the care and thoroughness that many

respondents gave to their replies and thanks them

for their time and effort.
Chapter 1-Summary, Major Findings, and Policy Issues ● 7

Photo Wick World 

Probably the clearest sign of the end of the cold war is the destruction of weapons such as these Czech tanks being

dismantled with cutting torches.

its forces over a period of years and then fight its way

across Eastern Europe. With the reduction in EastWest tensions, the danger of nuclear war has also

diminished considerably, as reflected by the reduced

alert status of U.S. nuclear forces.

Nevertheless, the global security environment

remains complex and frill of uncertainties. The

United States must hedge against a possible Soviet

reversion to global confrontation or new challenges

to U.S. security from other sources. In addition,

regional conflicts are more likely to involve the use

of advanced conventional weapons, ballistic missiles, and chemical, biological, and nuclear weapons. Thus, instead of a “clear and present danger, ’

the United States faces a spectrum of lesser but more

ambiguous threats in an overall security environment characterized by increased fluidity and uncertainty.

At the same time that the global security environment is undergoing a major transformation, severe

fiscal constraints arising from the ballooning Federal deficit and competing domestic needs are also

forcing cuts in the U.S. defense budget. Internationally, the Nation faces persistent trade deficits and

mounting competition in industrial and technological areas that formerly went almost uncontested. As

a result, many policy analysts have urged the

redefinition of U.S. national security to emphasize

the vitality of the domestic economy, the welfare of

the American people, and the international competitiveness of civilian industry.

In light of these fiscal and security trends, both the

administration and Congress have advocated prudent reductions in U.S. armed forces, with the aim of

retaining a military flexible enough to respond to a

wide range of unforeseen circumstances. President

Bush has outlined the administration’s vision of

‘‘deliberate reductions to no more than the forces we

need to guard our enduring interests-the forces to

exercise forward presence in key areas, to respond

effectively to crises, [and] to retain the national

capacity to rebuild our forces should this be needed.’

 compilation of Presidential Documents, vol. 26, No. 31, Aug. 6, pp. 
8 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

To this end, the Nation will need ready forces and

equipment capable of dealing with limited regional

conflicts, along with the ability to reconstitute larger

forces in the event of a serious crisis or war. By the

end of the decade, the U.S. military will likely

consist of fewer active and reserve forces armed with

advanced weapons, many of them upgrades of

current systems. American forces will have a reduced overseas presence and will therefore need

greater strategic mobility; they will also be more

dependent on mobilization of reserves to respond to

major military threats (see table l-l).

These changes in U.S. force structure, together

with fiscal constraints, will have important implications for the DTIB, as discussed in chapters 2 and 5.

A few examples illustrate these implications. First,

a reduction in Army heavy divisions and Navy

carrier task forces could result in a several-year

hiatus in tank and aircraft carrier production. Second, changes in military operations may necessitate

the development of new types of weapons and may

also create different surge requirements for theater

conflict. Third, the general reduction in procurement

funds will require more attention to lowering the

cost of systems and increasing the reliability of

fielded systems. Finally, a reconstituted Soviet

threat can no longer be the principal planning

contingency, with all other potential threats subordinated to it.

These implications for the DTIB helped establish

the parameters for OTA’s assessment of how the

Nation can rationally reduce the base to preserve

essential capabilities. The results of this assessment

are a list of proposed characteristics of the future

DTIB and identification of the strategic choices and

tactical decisions involved in the transition to that

base, as discussed in chapter 5 and outlined below.

Desirable Characteristics of the Future Base

Desirable characteristics of a DTIB that would

support future military needs are listed in table 1-2.

First, and most important, the future base will need

to retain an advanced R&D capability. In a period

of uncertainty about the nature of future threats

and acknowledged concern over the state of U.S.

technological competitiveness with other countries, preserving the R&D component of the base

must receive first priority. While production will

still receive more overall funding, a relative increase

in R&D funding will help reduce pressures to move

Table l-l--Characteristics of Future U.S. Forces

● Smaller active and ready reserve forces

● Less forward basing, greater strategic mobility

● Continuing weapons performance advantage

● Substantial nuclear capability

● Chemical and biological defense capabilities

. Greater dependence on mobilization

SOURCE: Office of Technology Assessment, 1991.

Table 1-2—Desirable Characteristics of

the Future Base

● Advanced research and development capability

● Ready access to civilian technology

● Continuous design and prototyping capability

● Limited, efficient peacetime engineering and production

capabilities in key defense sectors

● Responsive production of ammunition, spares, and

consumables for theater conflict

● Healthy, mobilizable civilian production capacity

● Robust maintenance and overhaul capability

● Good, integrated management

SOURCE: Office of TschnologyAssessment, 1991 .“Characteristics are not

necessarily listed in order of ptiority.

rapidly into full-scale production, thereby promoting a more deliberate approach to the defense

acquisition process. The defense base must also have

greater access to civilian technologies in sectors,

such as electronics and telecommunications, where

innovation is driven increasingly by commercial

applications. Such access will require changes in

current defense procurement laws and regulations that have increasingly isolated the DTIB

from civilian industry.

Maintaining defense R&D and production capabilities in a constrained fiscal environment will

revolve around continuous design and prototyping.

Since it is more difficult and time-consuming to

rebuild technological and industrial capabilities than

to mobilize manpower, retaining the capability to

develop the next generation of weapons and to

mobilize against a reconstituted threat will require

preserving facilities and personnel devoted to design, systems integration, prototype testing, and

manufacturing. Thus, future DTIB decisions must

maintain enough design and engineering teams to

produce new components and systems on demand. In a period characterized by more research

and less production, it will be necessary to build and

test prototypes between major procurement cycles.

Another consequence of smaller defense budgets

and longer weapon development cycles will be an

increased emphasis on improvements and retrofits of

existing platforms, which will help sustain the
Chapter 1--Summary, Major Findings, and Policy Issues ● 9

ability to manufacture subsystems and keep both

subtier firms and primes in the defense base.

The DTIB will continue to need a responsive

production or “surge” capacity to support limited

conflicts, but that capacity should be small and

geared toward essential materiel such as ammunition, spare parts, and consumables.9 If cuts in U.S.

active forces are accompanied by proportionately

smaller inventories of these items, there may be a

greater need for defense industrial surge in response

to a limited crisis or war. Responsiveness must be

funded and periodically tested.

The wartime consumption and production rates

needed to meet a reconstituted Soviet threat would

likely be hundreds of times larger than peacetime

production. The Nation cannot afford to maintain a

“warm” defense industrial base large enough to

satisfy this contingency. Since a reconstituted Soviet

threat or major new threat will take years to develop,

however, the wartime mobilization base for a major

conflict can be less responsive than was required in

the past. This wartime mobilization base would

consist of two elements: a dedicated defense base for

the procurement of major platforms, and a mobilizable civilian production capacity. The first of these

elements would be sized to meet peacetime defense

procurement needs, yet flexible enough to form the

core around which the larger wartime-mobilization

base could be regenerated when needed. The second

element requires a healthy national manufacturing

base, with sufficient quality personnel that can shift

their knowledge and skills from commercial production in peacetime to defense work in a national

emergency.

Since military weapon systems will likely remain

in inventory longer than in the past, maintenance

will become more important. The shift from the

urgent production and deployment of new systems

during the cold war era to the overhaul, remanufacturing, and upgrading of deployed systems over the

coming decades will have important implications for

the structure of the maintenance base, requiring a

reexamination of the mix between the public and

private sectors. It will also require additional emphaPhoto credit: U.S. Department of Defense

The B-52, first deployed in 1955, demonstrates that a

weapon platform can be upgraded by improving

components or munitions.

sis on designing systems for improved reliability to

reduce the need for future repair and overhaul.

Finally, the DTIB must have good, integrated

management to achieve its objectives in a fiscally

constrained environment, avoiding both extremes of

micromanagement and neglect. The test of management is whether the DTIB adequately meets the

goals of affordable peacetime acquisition and wartime responsiveness. Despite the success of Operation Desert Storm, projected modernization costs of

strategic bombers and other systems indicate that

current base management does not pass the affordability test. If the base is allowed to restructure in the

current ad hoc manner, it may be unable to respond

to a future crisis. An essential requirement for

managing the transition to the future DTIB is to

ensure better communications between peacetime

acquisitions personnel and the officials who plan for

defense industrial responsiveness in crisis and war.

Broad Strategic Choices

To achieve the desirable DTIB characteristics

outlined above, the United States will need a

long-term defense technology and industrial strategy for identifying and maintaining the critical facilities, technological know-how, and people needed

to develop future systems and to provide a core for

 of op. cit., footnote 1, p. 3. This report maintains the definitions of surge mobilization used a

 Security Environment. Surge is the used within DoD to refer to the expansion of military production peacetime without the declaration of

a emergency. Mobilization refers to the rapid expansion of military production to meet materiel needs in a war and involves the declaration of a national emergency. Several types of mobilization are considered. Full mobilization refers to mobilization to the existing or “program force”

structure. Total mobilization describes a mobilization effort that expands beyond the existing force structure.
10 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

regenerating expanded defense industrial capabilities in a timely manner. The Nation faces some broad

strategic choices about the nature of the future

defense base, including:

. the degree of national autonomy versus international interdependence,

● reliance on an arsenal system versus civil

integration, and

. the allocation of resources to current production versus future potential.

Autonomy v. Interdependence

One strategic choice relates to the extent to which

the DTIB is integrated into the world economy. The

Nation must choose the degree of defense industrial

autonomy that is necessary and possible in an

increasingly global technological environment. There

are risks both in excessive reliance on foreign

sources and in attempting to be fully autonomous. In the former case, the Nation risks losing

to offshore competitors both critical capabilities

and control over which technologies are pursued;

in the latter case, it risks higher procurement

costs, protected industries that lack innovative

drive, and loss of access to foreign technological

developments. The optimal tradeoff between interdependence and autonomy will depend on the

industrial and technological sector and the military

importance of the technology, as discussed in

chapter 5.

Arsenal System v. Civil Integration10

A second choice relates to the internal structure of

the base. There are two alternatives for dealing with

reduced levels of defense procurement. On the one

hand, the Nation can rely on arsenals, either government or privately owned, that might be sole-source

producers of particular military systems. On the

other hand, the Nation could modify its military

requirements to conform with what might be available from the commercial sector. Either choice will

require changes in government procurement laws

and regulations. In the absence of deliberate

policies, the DTIB is likely to converge toward an

arsenal structure as current procurement laws

impede civil-military integration and reduced

levels of production eliminate competition. An

optimal strategy may be to rely on the civilian

industrial base whenever possible, depending on

arsenals for those areas of defense development

and production having little or no overlap with

civilian technology, or where only monopoly

producers can survive.

Potential v. Current Capability

A third choice concerns the allocation of resources between maintaining current military capability and future military potential. While current

capability is needed for theater requirements (as

opposed to global conflict), two factors are shifting

the Nation’s relative emphasis toward future potential: fiscal constraints are limiting procurement,

while the less immediate threat of a major conflict

allows more time for development of new systems.

While the actual choice of this strategy will

depend on the defense industrial sector of interest, an overall approach of emphasizing future

military potential will remain prudent as long as

any large threat remains remote.

Tactical Decisions

In addition to considering the broad strategic

choices outlined above, the Nation will need to make

a number of tactical decisions about how best to

achieve the desired characteristics of the future

DTIB outlined in table 1-2. These tactical decisions

are discussed in detail in chapter 5.

Advanced R&D Capability

Maintainin g a viable defense R&D base in a

constrained fiscal environment will require identifying “core competencies,” or areas of technological

know-how critical for the development and production of major U.S. weapon systems. Since these core

competencies are largely embodied in the skills

and knowledge of individuals, the major challenge facing defense R&D policy is to attract and

retain key personnel and to develop a system in

which they can be most creative. Over the longer

term, interesting and meaningful work is thought to

be the primary motivator for such people. Thus,

while downsizing the base, it will be necessary to

maintain R&D funding and to provide challenging

tasks for defense R&D personnel, possibly through

research contracts and programs not directly tied to

production.

IOArse@s me USually considered to be govemment-ow~ facilities that manufacture military materiel. As discussed in thk report, however, ~

arsenal system is composed of either government facilities such as Watervliet Army Arsenal, or private firms that might be solesource producers of

a particular defense technology. The key point is that an arsenal is a single source that maintains a technology that does not exist in the civil sector.
Chapter 1--Summary, Major Findings, and Policy Issues ● 11

Photo credit: Los Alamos National Laboratory

The Los Alamos National Laboratory, managed by the

University of California under contract to the Department of

Energy, conducts both nuclear and non-nuclear defense

research as well as non-defense R&D.

With less opportunity for traditional competition,

new ways must be found to discipline, guide, and

evaluate R&D. To this end, new forms of competition might be pursued, such as competing design

teams within firms or increased international competition. A teaming or consortium approach involving

collaboration among two or more firms may also

work in lieu of competition in some cases. The

process of prototyping, discussed below, would

offer a means of maintaining competitive design and

manufacturing capabilities in a severely constrained

fiscal environment.

Design and Prototyping

Defense R&D will need to follow a dual-track

strategy, emphasizing on one track the development of advanced components and subsystems

for upgrading existing weapon platforms, and on

the other track, the continuous prototyping of

future weapon systems as a hedge against technological surprise. Competitive prototyping would

provide information about design concepts and new

materials while helping to preserve industrial design

teams and innovation in a constrained fiscal environment. Great strides in computer hardware and

software have opened up new capabilities for

simulation and computer-aided design with enormous

potential for future defense R&D, including prototype development.

A prototyping strategy might involve developing

several cycles of ‘‘technology demonstrators’ before one of them suggests a significant new military

capability, such as an operational electromagnetic

tank gun or improved stealth aircraft (see figure 1-3).

A limited production run incorporating the new

capability would allow investigation of production

processes and field testing of operational concepts.

If the system lives up to expectations, a force

modernization decision could be made. In addition

to testing of operational performance, prototypes

should be evaluated by a wide variety of criteria

including affordability, relative ease of manufacturing, reliability in the field, and maintainability.

Responsive Production

The responsive base that must be capable of surge

production can be limited to those consumables,

spare parts, and munitions that theater commanders

consider critical to their war-fighting needs. Much of

this responsive element will probably have to be

maintained in a dedicated defense base, although

some elements (e.g., clothing and food) can be made

to have sufficient commonality with civilian production to allow for greater use of the civilian base. The

key to having a responsive base is to develop

priorities and provide funding for a surge capability. Industrial preparedness planning requires a

coherent management approach that includes maintaining realistic war reserve stocks. Some degree of

foreign dependence is unavoidable, but foreign

vulnerability can be minimized by identifying multiple foreign suppliers and by stockpiling foreignsourced parts.

Mobilizable Production Base

While the responsive portion of the DTIB enables

the Nation to cope with less challenging but more

likely theater-level contingencies, producing military equipment in peacetime at affordable prices

requires a much larger industrial base-partly dedicated to defense production and partly in the civil

sector. This component of the base would also

provide a hedge against a reconstituted Soviet threat

or other great-power threat that could arise over a

period of years. Since a surge capability in this

portion of the base is neither affordable nor

necessary, the manufacturing facilities in the

mobilizable production base dedicated to defense

production (e.g., military aircraft and armored

vehicles) should be sized for small, realistic

production rates.

Mobilization plans for this larger base might

be driven as much by what technologies are
12 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Figure 1-3-Dual-Track Prototyping Strategy

R&D

civil and military

I

Weapon system

prototyping/technology

demonstration 4

No

Yes

Operational

testing

No —

Yes

Yes

No

Yes

Full production

for force

modernization

No

Component prototyping/technology ~

demonstration

No

Further

retrofit 

effective

Yes

SOURCE: Office of Technology Assessment, 1991.
commercially available as by the desire to maximize military performance. If the Department of

Defense (DoD) is to make more effective use of the

broader civilian base, it will require better data about

the commercial availability of dual-use products so

that it can identify the industrial sectors in which

civilian and defense production can be integrated

most effectively. Moreover, since the mobilizable

component of the defense base is embedded in the

larger civilian base, the ability to mobilize will rely

on a strong, competitive U.S. economy. The transition strategy for this component of the DTIB might

therefore be shaped by policies to improve the

international competitiveness of the broader U.S.

industrial base. Policies must also consider the

change in corporate culture that must occur if

defense firms are to work effectively in a civilian

environment. Many of the steps argued to be

necessary for strengthening the broader base, such as

tax reform and improved technical education, are

outside the purview of DoD and the other nationalsecurity agencies of the Federal Government.

A recent OTA assessment of international arms

cooperation noted that foreign defense firms in

Europe and Japan are structured to make much more

use of their civilian capabilities.ll This structure has

resulted, at least in part, from different approaches to

acquisition and accountability. An essential step in

the transition to the future DTIB is a major review of

the defense acquisition laws to identify changes that

allow greater integration of the civilian and defense

sectors. Some of these specific changes are discussed in chapter 5.

Maintenance and Overhaul

The expected longer service life of deployed

systems will ultimately increase the importance of

maintenance and overhaul capability. Traditionally,

this activity has been performed mainly by the

military services, but a growing number of manufacturing firms are interested in maintenance, remanu-

 Military Technology and Weapons, 

(Washington DC: U.S. Government Printing June 1991).
14 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 1-3—Options for Change in the DTIB

Tiers of the base Ownership

Prime Subcontractor Supplier Private GOCOa

R&D

Current base Emphasis on systems

development for

production

Desired future Emphasis on

base technology

demonstration,

prototyping, and

potential production

Subsystem R&D

funded through

production contracts

from primes

Subsystem R&D

funded through

government or

commercial

development

R&D generally driven scaling back on Isolation from civil

by civil requirements investment in R&D sector

Same as above Explicit government More integration of

funding of military- commercial

unique R&D; greater technologies and

access to dual-use technology transfer to

technologies the civil sector

Production

Current base

Desired future

base

Excess capacity, rapid

production to field new

systems and minimize

unit costs

Reduced overall

capacity, low rates of

production to maintain

warm base and

personnel skills

Respond to subsystem

requirements from

primes for new

platforms

Respond to subsystem

requirements for retrofit

of current platforms and

new platforms

Extensive integration

with civilian base,

concern over

increasing

internationalization of

the supplier base

Rationalize supplier base

to protect against

potential vulnerabilities

Largest element; Limited Competition and

operates competitively reduced capital

in a relatively high-risk requirements;

environment government moderates

risk by providing some

facilities and tools and

gains efficiency of

private management

Reduced risk through Relatively more

multi-year contracting reliance on GOCOs as

and more rational a result of reduced

application of peacetime production

competition requirement and to meet

surge targets for

theater conflict

Current base Essential but limited Maintenance of Not applicable Essential but limited Maintenance of nuclear

involvement in subsystems involvement in weapons primarily

maintenance maintenance

Maintenance

I

Desired future Increased involvement Same as above Not applicable Increased involvement lncrease use of GOCOs

base in maintenance in maintenance to to reduce business risk,

maintain production provide greater

capability management efficiency

a Government-owned/Contractor-operated.

b Government-owned/Government-operated

SOURCE: Office of Technology Assessment, 1991.

facturing, and retrofitting systems as a means of

surviving in a period of reduced production. As

noted above, however, the dual-track approach to

prototyping may help to maintain key design and

systems engineering capabilities. The Services are

also wary of placing too much reliance for maintenance on private firms. Allocating maintenance

contracts between Service depots and private firms

should therefore be aimed at preserving a reliable

in-house capability while helping to support the

commercial production base.

Good, Integrated Management

During the period of rapidly increasing defense

budgets in the 1980’s, defense procurement laws and

regulations were developed to provide wide access

to government funds through mandated competition

and to ensure accountability in the use of those funds

through extensive auditing procedures. Some of

these laws and regulations now appear inappropriate

for dealing with the transition to a smaller future

DTIB. An improved management strategy would

modify these laws and regulations, would attempt to

make funding more predictable (e.g., through greater

use of multiyear procurement contracts or adoption

of multiyear defense budgets), would link defense

industrial policies explicitly to operational plans,

and would take steps to improve the quality of

personnel involved in managing the DTIB.

ISSUES FOR CONGRESS

Congress will play an important role in defining

the nature of the Nation’s future defense technology
Chapter l-Summary, Major Findings, and Policy Issues ● 15

Table 1-3—Options for Change in the DTIB—Continued

Industrial sectors

Defense Combat

GOCOb

electronics vehicles Shipbuilding Aerospace Ordnance

Fragmented lab Commercial sector Military-unique,

structure, Iack of R&D dominates geared toward

strategy production

Consolidate tabs to Greater use of Greater use of

become world-class commercial prototype development

developers of specific developments that may or may not

military technologies lead to production

Preserve unique

military technologies

that would be too costly

or risky to produce in

the private sector

Same as above

Strict military

requirements and

specifications have

isolated defense from

civil sector

Modified requirements

and changed

procurement

procedures to allow

increased use of civil

sector

Tremendous overcapacity, anticipated

trough in production

Size plants for smaller,

more realistic

production rates

Defense sector

dominates, commercial

sector not competitive

Same as above

Robust, but largely Military-unique, geared

focused on system toward production

development for

production

Shift in emphasis Greater use of

toward a more prototype development

deliberate that may or may not

development strategy lead to production

and use of technology

demonstrators

Inadequate demand to

maintain competition

among shipyards

increased reliance on

single sources for

production of warships

and submarines

Overcapacity,

anticipated trough in

production

Less frequent

modernization, with

retrofits and upgrades

of existing platforms

Overcapacity, including

mothballed munitions

plants, yet

questionable surge

capability in many

systems

Reduced capacity,

improved surge

capability for selected

items

Major element of Maintenance Maintenance Maintenance Maintenance Maintenance

maintenance base, now performed mainly performed mainly in performed in both performed mainly in performed mainly by

undergoing by Services Service depots public and private Service depots Services

consolidation shipyards

Relatively reduced use, New designs decrease Competition between More private sector Increased competition Same as above

with sufficient depots to maintenance requests Service depots and maintenance between Service

maintain core private sector depots and private

capabilities ——— sector —

and industrial base. The desirable DTIB characteristics developed in this report provide a point of

departure for congressional debate. These characteristics imply fundamental changes in the way the U.S.

Government acquires military materiel and applies

its technological and industrial strength to national

security. Table 1-3 outlines options for change in the

DTIB in terms of four perspectives discussed in

chapter 3: functional area (R&D/production/maintenance), size of firm (prime/subtier/supplier), ownership (private/government-owned), and industrial

sector (e.g., ammunition or shipbuilding).

The research and development effort, for example, is characterized in the current DTIB by emphasis on systems development for production but

would change in the future base to place more

emphasis on technology demonstration, prototyping, and potential production, as outlined in chapter

5. This shift in the orientation of defense R&D away

from assumed production of a future system has

many implications that require congressional consideration. One particularly difficult issue arises from the

fact that considerable component research and

development is currently embedded in freed-price

contracts that flow from prime contractors to the

subcontractors who actually produce subsystems.

These subcontractors, many of whom survive by

virture of proprietary technical data that gives them

a competitive edge, are reluctant to take direct R&D

contracts because of concern over loss of technical

data lights to the prime contractor and the government. Congress may wish to take action to limit
16 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

government rights to technical data, thereby making

it easier to incorporate commercial technology into

defense systems. Unless this concern is addressed

adequately, many more subcontractors may leave

the defense business. Table 1-3 contains a number of

other similar issues that could lead to legislative

action.

Congress will shape the ultimate choices the

Nation makes with regard to the broad strategies

outlined earlier, all of which involve tradeoffs

between national risks and benefits. As noted above,

the choice between national autonomy and interdependence involves balancing the risks of relying on

other nations for critical defense goods against the

benefits of access to the growing number of technologies developed abroad and the synergies that arise

from cooperation with economically strong allies.

The choice between arsenals and civilian integration

involves balancing the risk of losing key military

technologies against the benefits of access to a broad

range of useful civilian technologies and a greater

latent mobilization capacity. The choice between

military potential and current capability involves

balancing the risk of being inadequately prepared to

meet near-term threats against the benefit of developing more effective future weapons. None of these

broad strategies is likely to be pursued in absolute

terms, and the application of any given strategy will

be tailored according to ownership, tier of the base,

functional area, and industrial sector.

Congress will have a deciding role in which

tactics to pursue to achieve and maintain the desired

characteristics of the future DTIB. First, congressional action will be required for the explicit full

funding of R&D previously supported by production. Since the government’s calculation of past

R&D costs have often not included the money that

firms have spent from profits, the explicit R&D

funding requirements may appear high. Second,

Congress will want to examine new forms of

competition that are more amenable to a fiscally

constrained environment, such as competitive prototyping or encouraging radically different approaches

to achieving a given military objective instead of

competitions between similar platforms. Third, Congress will want to consider the tactic of using foreign

sales to maintain production lines, including an

assessment of the long-term national security implications of the proliferation of advanced conventional weapons.12

Obstacles to redesigning the DTIB arise from

incentives in both government and the private sector

to maintain current capabilities rather than to restructure the base to emphasize future military

potential. In addition, anticipating changes in the

base involves asking both industry and DoD to make

decisions that entail definite short-term costs in the

interest of obtaining uncertain long-term benefits.

To cut through these constraints, the Nation needs a

long-term defense technology and industrial strategy that provides a predictable planning environment for government organizations and fins. The

strategies and tactics laid out in this report could

provide the basic elements of such a planning

environment.

All of these policy options demand fundamental

reexamination of, and specific changes in, procurement laws, regulations, and specifications. The

current procurement process discourages many qualified firms from bidding on defense contracts

because of the large amounts of paperwork involved

and military specifications that are often excessively

demanding. Another problem stems from the twin

objectives of access and accountability, which have

driven the competitive approach to defense procurement. Numerous Federal laws and regulations have

been designed to ensure access to DoD contracts by

the maximum number of firms, as well as accountability of government funds by those winning such

contracts.

Congress has viewed competition as an ideal way

of reducing costs, increasing access to new fins,

and stimulating innovation. These goals are embodied in statutes mandating competition for defense

contracts, such as the Competition in Contracting

Act (CICA) and laws that require “setting aside”

certain percentages of defense contracts for small

and disadvantaged businesses. Unfortunately, as

discussed in chapter 4, competition as currently

practiced often ends up increasing overall procurement costs while doing little to foster innovation.

Although the law allows exemptions from competition where it is inappropriate, in practice the

exemptions are rarely exercised because of a lack of

bureaucratic incentives for doing so. Competition is

thus an important management tool that should be

IWTA, Glo~lAr~‘1’rde,ibid, addresses the proliferation issue in deti.
Chapter 1--Summary, Major Findings, and Policy Issues ● 17

structured differently in the future. One way maybe

to emphasize competitive design and prototyping, as

discussed in chapter 5.

The principle of accountability also warrants a

new look by Congress. Large increases in defense

expenditures in the early 1980’s and revelations of

criminal conduct by some defense contractors led to

growing congressional concern with ensuring the

proper use of government funds. While accountability is clearly essential, there are indications that the

current approach is counterproductive. Government

and company auditors consume large amounts of

time and money contesting what is or is not

allowable, and the criminal sanctions associated

with violations of many defense-procurement laws

cause contractors to fear that honest mistakes could

lead to prosecution and possible prison terms. Under

these conditions, companies have a strong incentive

to err on the side of caution, even if this means taking

measures that increase procurement costs considerably. Moreover, the government’s special auditing

requirements have the unintended effect of isolating

the defense industry from the civilian sector. Given

budgetary constraints, Congress may wish to reform

the current approach to ensuring accountability by

moving more in the direction of commercial business practices.

Finally, U.S. procurement law in the 1980’s

stressed competition and accountability in a way that

transferred more risks to the defense industry. Since

defense spending was increasing rapidly and the

overall economy was engaged in a national borrowing spree, companies were generally willing to build

new manufacturing facilities and to accept small

near-term profits in the expectation that future sales

based on projected production would amortize the

investment. Yet the sharp downturn in defense

spending is now confronting the industry with

financial problems that may well result in the loss of

critical elements of the DTIB. Congress may therefore wish to examine new ways of rationalizing the

base so that the Nation retains a sound defense

industrial capability and not simply a collection of

lucky survivors.

SUMMARY

This report provides the framework for congressional debate over the transition to a downsized but

still robust DTIB. In the aftermath of the cold war,

the Nation no longer faces a single predominant

threat to its security and global interests but rather an

array of lesser, ambiguous threats. Dramatic changes

in the security environment-the dissolution of the

Warsaw Pact, the withdrawal of Soviet forces from

East-Central Europe, and the growing turmoil within

the Soviet Union-combined with increased fiscal

constraints in the United States, are resulting in

significant cuts in U.S. defense spending.

The decline in budget authority since 1985 and the

expected sharp drop in procurement contracts over

the next 5 years has already affected the DTIB.

Defense contractors, both prime and subtier, are

adapting to a s “ hrinking market by diversifying or

leaving the defense business altogether. At the same

time, procurement laws relating to military specifications, competition, and accountability, many of

them written during a period of rising military

budgets, now create serious obstacles to the rationalization of the base and the greater integration of

civilian and defense production. If this ad hoc

restructuring process is allowed to proceed, it could

jeopardize the Nation’s future ability to develop

affordable, high-performance weapon systems and

to mobilize its defense industrial capacity in crisis

and wartime.

A rational transition to a downsized but viable

DTIB will entail preserving critical, long-lead-time

design and production capabilities. This task will in

turn require Congress to demonstrate leadership by

taking a broad strategic approach to the Nation’s

future national security needs, even at the expense of

some immediate political and economic concerns on

the part of States and congressional districts.
Chapter 2

Threats, Forces, and Operations
Contents

Page

INTRODUCTION ****. ..*. .*. ... ... *.. ... ... ... *.. ... *.. ... **. ..*+

. ... ..*** +.*. q* 21

CHANGING U.S. STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

U.S. Security Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Strategic Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

THE NATURE OF FUTURE MILITARY THREATS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Third World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

The Continuing Nuclear Threat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

POSSIBLE FUTURE FORCE STRUCTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Size and Type of Contingency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Force Readiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Autonomy of Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Desired Performance of Weapons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

EFFECTS ON THE INDUSTRIAL BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Box

Box Page

2-A. Forecasts of Future Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Figures

Figure Page

2-1. United States Defense Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2-2. Active Armed Forces Personnel, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

2-3. Major National Military Budgets, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Tables

Table Page

2-1. Countries Producing Weapons-Now Through 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

2-2. Force-Structure Choices Affecting the Defense Technology and Industrial Base . . . 28

2-3. Major Military Elements Under Several Proposed Defense Reductions . . . . . . . . . . . . 28

2-4, Characteristics of Future U.S. Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Chapter 2

Threats, Forces, and Operations

INTRODUCTION

The defeat of the Axis powers, the end of World

War II, and the beginning of the cold war required a

complete review of U.S. national security policy. A

similarly comprehensive review is warranted in the

aftermath of the cold war, including reexamination

of the size and structure of U.S. military forces and

their supporting industry. Restructuring the forces

entails policy choices with important consequences

for defense technology and industrial base (DTIB)

planning. This chapter is not meant to provide an

answer to the question of what the future structure of

U.S. forces should be, but rather to provide a useful

and considered estimate of what it will be, for the

purpose of assessing the effects on the DTIB.

CHANGING U.S. STRATEGY

After the Second World War, several events

combined to create new security challenges for the

United States and the world. The Soviet Union’s

totalitarian system, expansionist ideology, and imposition of client regimes in Eastern Europe made it

a military threat to the West. Clear and apparently

irreconcilable ideological differences between the

Communist countries and the Western-oriented

democracies forced most nations into one of the two

camps, forming a‘ ‘bipolar’ world. With the Soviet

development of atomic weapons, the nuclear threat

hung over every calculation of war and created for

Americans an unprecedented sense of national

vulnerability. At the same time, the United States

came to view regional conflicts throughout the

world through the prism of the superpower rivalry.

The North Korean invasion of the South in 1950

and the continuing confrontation in Europe created

the impression that the Soviet Union was intent on

expansion, that another world war might be imminent, and that such a war would be nuclear and

devastating. These perceptions led the United States

to implement a new policy of “containing” the

Soviet Union by reversing the post-war dismantlement of the U.S. military and its supporting industry.l Defense spending shot up from $78 billion to

$331 billion (in fiscal year 1990 dollars).2 The

United States hoped that the strategy of containment

would prevent the Soviet Union from dominating

the Eurasian continent while avoiding a third world

war. This state of tense, alert peace came to be called

the “cold war.”

The cold war and containment required something

new of the United States. U.S. policymakers feared

that Soviet conventional military capabilities in

Europe were so formidable, and the destruction from

a nuclear strike would be so devastating, that the

Nation would be unable to recover from a surprise

attack and mobilize over a year or more as it had in

World War II. Thus, highly ready forces had to be

deployed both at home and abroad to counter

similarly ready Soviet forces. The United States

settled into a state of continuous military alert and

partial defense-industrial mobilization.

During the cold war era, the clarity of American

security objectives owed much to the clarity of the

Soviet threat. Although great debates raged at times

over details and execution, there was a general

Photo credit: U.S. Department of Defense

During the cold war the annual parade through Moscow’s

Red Square demonstrated Soviet military power and

emphasized the global military confrontation.

 (George K “The Sources of Soviet Conduct,” Foreign Affairs, vol. 25, No. 4, July 1947, pp. 566-582.

 Glasnost, Perestroika, and U.S. Defense Spending DC: Institution 1990), table 1.
22 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

consensus about the basic objectives of U.S. national

security policy. As Paul Nitze writes:

For over forty years the foreign and defense

policies of the United States have been guided by a

central theme, a well-defined basic policy objective.

That goal, throughout the Cold War, was for the

United States to take the lead in building an

international world order based on liberal economic

and political institutions, and to defend that world

against communist attack.3

Because the cold war mobilization was a direct

response to East-West tensions, the diminution of

those tensions may result in a comparable degree of

demobilization.

Planning future military forces requires some idea

of a future national strategy. As the singular military

threat from the Soviet Union diminishes, however,

designing a national security strategy will become

more subtle and complex. There are two major

changes in the security environment: the diminished

military threat, and the increased importance of

non-military factors. While economic performance,

access to raw materials, capital accumulation, and

ideological appeal are all part of any security

calculation, the relative contributions of each and the

balance between military and non-military considerations are shifting.

By the broadest definition, economic problems

are ultimately security problems because the extent

of a nation’s military power is limited by its

economic resources and by necessary tradeoffs

between social-welfare and defense spending. The

ability of the United States to manufacture weapons

will be constrained by a decline in its overall

manufacturing capabilities. In addition, the military

requires goods, such as food and fuel, that are clearly

“civilian” yet are critical to military operations.

Although defense procurement makes up only about

3 percent of the U.S. gross national product (GNP),

the fact that it constitutes 21 percent of capital goods

manufacturing and that in a major war a far greater

percentage of GNP would be applied to military

production (39 percent in World War II) indicates

that the Nation’s overall economic performance is an

important determinant of its military potential.

This report, while recognizing that there is no

sharp dividing line between civilian and military

industry, concentrates on that part of the U.S.

industrial base specifically devoted to weapons and

other critical military equipment. The broader economic issues treated here are those that most concern

military capabilities, such as how the state of the

U.S. electronics industry affects the military’s access to critical electronic components.

U.S. Security Objectives

According to a recent statement by the President,

the United States has four basic national security

objectives:

1. ensuring the survival of the Nation as a

politically independent entity,

2. promoting economic prosperity for Americans

and the world,

3. maintaining a stable world order conducive to

liberty, and

4. forging strong ties to allies and like-minded

nations throughout the world.5

For the foreseeable future, attaining these objectives

will require military forces to supplement economic

and diplomatic tools.

Preserving national survival and sovereignty are

the foremost objectives of any state. Beyond these

basic needs, however, the United States has the

power and resources to pursue other objectives.

First, the United States seeks to promote its own

prosperity and that of friendly nations through a

stable international environment. Second, the United

States is a liberal democracy, supports like-minded

democracies around the world, and officially promotes the process of democratization in other

countries.

Strategic Alternatives

The future national security strategy of the United

States may follow one or more of the following

paths:

1. the Nation may try to maintain its current

military security arrangements with the minimum changes possible,

qpa~ H. Ni@e, “America: An Honest Broker,” Foreign Aflairs, VOI. 69, No. 4, f~ 1~, pp. 1-14.

AUnder SecretW of Defense (Acquisition), Bolstering Defense Industrial Competitiveness (Washington DC: Department Of Defense, J~Y 1988),

p. v.

Sfiesident Bush, National Security Strategy of the United States (WashingtorL DC: The white House, mch 1990, PP. 2-3.
2.

3.

4.

The poster reads, “Farewell, Czechoslovakial” ‘ “

it may withdraw economically and militarily as the North Atlantic Treaty Organization (NATO)

and become more isolationist, may lose their primacy. Instead, the ad hoc alliance

it may remain internationally engaged but act formed to counter Iraq maybe the model for future

unilaterally or through ad hoc alliances, aban- alliance relations, although the United States may

cloning the permanent alliances designed pri- not take the lead every time.

marily as counters to the Soviet Union, or

it may act increasingly through multinational

organizations such as the United Nations.

The actual strategy most likely will be composed

of some combination of these alternatives. Current

evidence suggests, however, that a major disengagement is the least likely route for the United States to

follow. All of the other strategies require military

force that can be projected across the world.

Moreover, since the beginning of World War II, the

United States has sought to act within an alliance

context for military and political support. Without

an immediate Soviet threat, however, alliances such

THE NATURE OF FUTURE

MILITARY THREATS

Europe

U.S. policymakers have long recognized that

economic and industrial power create military potential. Thus, the United States has considered the

domination by any single power of Europe’s industrial production—and hence its military potential—

to be a long-term threat to American security. This

concern was a major factor in U.S. cold war policy.
24 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

The security of Europe retains its historical

importance to the United States. The difference now

is that the threat of a large-scale conventional attack

has greatly diminished: estimates of warning time

have increased from 2 weeks to as much as 2 years.

Even if the Soviet Union remains intact and powerful, an important buffer now exists between Soviet

military forces and NATO Europe.

Military security is difficult to measure on an

absolute scale, but the situation today suggests that

the relative likelihood of a major war in Europe

involving the United States has fallen to its lowest

level since the end of World War II. Yet even

without a threat of short-warning surprise attack,

Europe may still need the U.S. long-term potential

for reinforcement and mobilization to counter a

reconstituted Soviet conventional threat. Moreover,

non-nuclear European nations, like Germany, may

still want a U.S. nuclear guarantee.

Instability in Eastern Europe or the Soviet Union

itself, while not a ‘‘threat’ in the normal sense,

could pose a danger to U.S. and NATO security. One

can envision widening circles of chaos that could

draw the United States into a conflict. Thus,

President Bush can say with some justification that

the enemy is “instability.” Having intervened in

two World Wars that began in Europe, the United

States clearly has an interest in maintaining stability

in that critical region.

Third World

The importance to U.S. security of countries

outside the advanced industrial nations, often

lumped together as the “Third World,” has been

much debated. There are two basic schools of

thought. 6 One school argues that the United States

should concentrate almost exclusively on the security of the world’s industrial centers and oil-rich

regions because they are the sources of economic

and military power. Since the Third World’s economic power is limited and diffuse, it is of secondary

security interest to the United States except for a few

special cases such as Panama, Saudi Arabia, and

Kuwait.7 Members of the opposing school contend

that straightforward calculations of industrial power

are too simplistic. They argue that while the

geographic position and resources of any single

Third World country may not be vital to the United

States, the loss of access to resources or basing rights

in several Third World countries could affect the

global balance of power. In addition, while war in

Europe would be far more damaging than conflict in

the Third World, the latter is so much more likely

that it deserves greater attention.8

Much of the past argument about the strategic

importance of the Third World concerned its role in

the global competition between the Soviet Union

and the United States. Since the Soviets have

essentially withdrawn from that competition, however, balance-of-power arguments supporting U.S.

intervention in Third World conflicts are no longer

compelling. A few geopolitical considerations may

survive the end of the cold war, but they have also

been weakened. The United States will always be

concerned about potential instability in Mexico and

other neighboring states, but threats to straits and

other transportation choke-points were most significant in the context of a potential global conflict with

the Soviet Union. Even then, it was easy to

exaggerate the significance of these threats, since

there were always alternative transport routes.9 For

example, anyone with a map can point out the vital

importance of the Suez Canal, yet it was closed for

years after the 1967 Arab-Israeli War without

disastrous effects.

Some observers argue that the Third World’s

soaring populations, shortages of food and other

resources, rising religious fundamentalism, and

expanding arsenals of modem weapon systems may

make it a zone of perpetual crisis. Other analysts,

however, suggest reasons why the Third World may

become more stable: the process of decolonization is

essentially complete, nation-building is well advanced, and the Soviet Union’s ideologically driven

intervention has ended. It is therefore uncertain

whether the world outside Europe and North America will experience more or less civil and interstate

conflict in the future.

6For ~ good ~mp~~on of the ~~Wents on ~~ sides, see Michael C. Desch “me Keys ~kk up tie World: Identifying American

Interests in the Periphery,’ International Security, vol. 14, No. 1, summer 1989, pp. 89-121.

Tor a succinct exposition of this view, see Stephen Vm Ever% ‘American Strategic Interests: Why Europe Matters, Why the Third World Doesn’4°

Hearings b~ore the Panel on Defense Burdenshanng, Committee on Armed Services, U.S. House of Representatives, Mar. 2, 1988.

8S= Steven R. David, “Why the Third World ~tterS, ” International Security, vol. 14, No. 1, summer 1989, pp. 50-85.

%obert H. Johnsoq “ExaggeratingAmerica’s Stakes in Third World Conflicts,” International Security, vol. 10, No. 3, winter 1985-86, pp. 32-68.
Chapter 2—Threats, Forces, and Operations ● 25

Photo credit: U.S. Department of Defense

American troops continue to patrol the cease-fire line

between the two Koreas.

In any case, most Third World conflicts are the

result of long-standing local animosities that do not

automatically imply threats to Western security .10

While the United States will continue to have moral

and humanitarian concern for the poor Third World,

such countries are unlikely to pose threats to U.S.

security interests that would warrant a large-scale

intervention by American forces. Moreover, even in

those rare cases where U.S. intervention proves

necessary, the very large majority of nations of the

world have such limited military capabilities and

potential that even a relatively small U.S. force

would be adequate to handle most contingencies.

Other than the Soviet Union, only a handful of

nations have substantial military capability and also

control a vital resource (in practice, this means oil)

or threaten a U.S. ally or important U.S. interests.

The number of potentially serious threats is small

enough that instead of planning for a “generic”

Third World threat, specific cases can be considered.

North Korea and a number of countries in the Middle

East represent the most challenging potential

threats, providing a yardstick for future U.S. force

requirements.

The United States, of course, calculates its military requirements in context, such as including

South Korea’s substantial military capability when

estimating the potential threat from North Korea.

Nevertheless, since the United States must fight far

from its shores and may be constrained in its military

options by political considerations (e.g., access to

foreign bases), U.S. force requirements may be

greater than a simple comparison of size and

economies would suggest.

The types of military operations that the United

States would conceivably undertake in most parts of

the Third World might require tailored intervention

forces with special equipment and training, but one

would have to postulate unexpected reversals and

protracted conflict involving U.S. forces before the

military requirements would be taxing. Moreover,

those Third World crises that do flare up should be

much easier to handle without the threat of Soviet

intervention hanging over every move. Imagine the

recent Persian Gulf War if Iraq had still been a Soviet

client state. Each U.S. action would have been

weighed against the risk of Soviet intervention, and

the Syrians and several other Arab states most likely

would have withheld support from the United States

or even sided with Iraq. The West Europeans,

worried about antagonizing the Soviets, would have

been much less forthcoming. What was already a

formidable task could have become paralyzingly

complex.

While only a handful of Third World nations have

any significant domestic weapons production capacity and none has a comprehensive defense technology and industrial base (see table 2-l), Third World

weapon production capability is increasing, often

An ever-increasing number of Third World countries

produce and export weapons. In the hands of a hostile

regional power, the Chinese Silkworm missile could

greatly complicate U.S. military planning.

 pp. 
26 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 2-l-Countries Producing Weapons—Now Through 2000

Major independent Indigenous production of Limited production of Limited production of Minimal weapon

weapon production a wide range of weapons many types of weapons a few types of weapons production capability

United States Brazil Chile Argentina Algeria

Soviet Union India Greece Egypt Iraq

France Israel Indonesia North Korea Libya

Germany South Korea Iran Taiwan Morocco

United Kingdom Yugoslavia Malaysia Canada* Syria

China South Africa Singapore

Poland Spain* Pakistan

Czechoslovakia Thailand

Italy Turkey

Sweden

Japan*

● Additional estimates by OTA.

SOURCE: Briefing by David Louscher, “Patterns of Demand and Supply of Weapons.”

with Western help.ll The problem is not just

production but the widespread availability of weapons on the open market. Other than nuclear weapons,

there is very little that any country with the money

cannot buy. Some Third World nations, especially

those with oil reserves, have been able to acquire

large arsenals. Several nations have bought sophisticated weapons such as antiship cruise missiles,

which, even if not possessed in large numbers, could

severely complicate U.S. defense plans. In addition,

some of the existing inventory in Europe may be

sold off on the international market as surplus.

Although the U.S. defense industry favors promoting arms sales to support the DTIB, this policy

makes little sense if it encourages transfers of

weapons to countries that may foster regional

instability or become adversaries in the future.

In summary, the transformation of the global

security environment will result in changes in U.S.

force structure, in turn imposing new demands on

the supporting defense technology and industrial

base. Competing and conflicting requirements may

create conundrums for DTIB planners. On the one

hand, the large increase in warning time available

before the Soviet Union could launch a credible

conventional attack, as well as the buffer of newly

independent states between NATO and the Soviet

Union, are transforming the challenge of meeting a

Soviet threat into one of reconstituting a large U.S.

military capability over a period of years. On the

other hand, there are many lesser contingencies that

require forces-in-being. The defense-industrial requirements of these ready forces will be very

different from those needed for long-term force

reconstitution. Allocating limited resources between

these two sets of requirements is an important policy

issue affecting the DTIB in the coming decade.

The Continuing Nuclear Threat

Although the threat from Soviet conventional

forces is much reduced, there has been no comparable reduction in the destructive capabilities of Soviet

strategic nuclear systems, which continue to pose a

direct threat to the United States. Even so, it is

generally believed that the nuclear threat has diminished, for several reasons.

First, although prudent military planners often

contend that one should not consider intentions but

concentrate only on capabilities, that approach is too

simplistic. Both the British and the French have

nuclear arsenals that could destroy the United States

as a modem society, yet Americans do not worry

about those capabilities because of their confidence

in the intentions of these allies. The Soviet Union

clearly has become less belligerent over the last

several years, and the circumstances in which the

Soviet leadership would consider using nuclear

weapons are almost certainly less likely than in the

past. Thus, U.S. warning and nuclear readiness

levels have begun to be reduced.

Second, nuclear war would be so horrible that no

one can easily imagine a provocation strong enough

to start one. Most military planners have judged that

the most plausible route to nuclear war is escalation

from conventional war. Yet the United States has

supported President Gorbachev in his difficult

efforts at reform and has made it clear that NATO

1lu.s, Con=ess, Offiw of khno109 Assessmen4 Global Arms Trade: Commerce in Advanced Military Technology and Weapons, OW-HCAW

(Washington DC: U.S. Government Printing Offlce, June 1991).
Chapter 2—Threats, Forces, and Operations . 27

Photo credit: U.S. Department of Defense

Although the Soviet conventional threat to Europe is much

reduced, Soviet nuclear capabilities, such as this Typhoon

missile-launching submarine, remain formidable.

does not threaten Soviet security. The risk of

conventional war has accordingly declined, and

without a conventional war little nuclear incentive

exists.

Finally, the sea-change in U.S.-Soviet relations

might allow a slowing of the quantitative and

qualitative nuclear arms competition. Each side’s

modernization efforts drive the other’s to some

extent and require costly countermeasures to maintain an assured second-strike capability. Even if the

two superpowers remain wary of each other, changes

in the Soviet Union make it at least conceivable that

retaliatory security can be assured by a substantial

reduction in the number of strategic nuclear weapons

on both sides. The current START negotiations are

a move in that direction.

Perhaps the greatest potential for an increased

threat from Soviet nuclear weapons would follow

from instability or breakup of the Soviet Union.

Centralized control over nuclear weapons might

then be lost or pass to small, untested, perhaps

unstable governments. While it is difficult to imagine any of the potential new governments starting a

war with the United States, the presence of nuclear

weapons increases the dangers of instability.

The U.S. policy of extended deterrence has

assigned some role in deterring conventional aggression in Europe to both theater nuclear forces based

on European soil and central strategic systems in the

United States. As the conventional threat to Europe

diminishes and the possibility of a Soviet military

victory recedes, nuclear weapons will become, in

NATO’S words, “truly weapons of last resort.”12

With deterrence of war provided primarily by

NATO conventional weapons strength, the portion

of the U.S. nuclear force dedicated to NATO could

be reduced.

Although the Soviet nuclear threat may be diminishing, the second tier of nuclear powers and the

spread of nuclear weapons to other nations remain

sources of concern. Nuclear weapons are so destructive that the possession of small numbers by even

one hostile nation could be a significant threat to

U.S. security. Fortunately, past predictions of the

expansion of the nuclear club have turned out to be

overly pessimistic, since many states with a nuclear

weapon potential have chosen to forego the option.13

The problem is not a general worldwide rush to go

nuclear by every country that is technologically

capable of it, but rather the efforts of a few renegade

nations such as Iraq, North Korea, and Libya.

Although these cases present a challenge, sanctions

are more effective against a small number than

against a general trend.

POSSIBLE FUTURE FORCE

STRUCTURES

Future military force structure will be the result of

decisions based ultimately on judgments about the

size and character of the threat and on the resources

available to develop and maintain the forces. Four

major force-structure judgments will affect requirements for the defense technology and industrial

base:

1. the expected size and type of the threat that

must be countered,

2. the desired rate at which forces should be

committed and the length of time they should

be sustained,

3. the autonomy desired for U.S. forces, and

4. the expected performance of U.S. weapons

compared to those of potential adversaries.

The assessed size and type of threat clearly affects

the desired overall size of U.S. forces and, hence, the

size of the peacetime DTIB. The desired rate of force

commitment determines the readiness of the force,

 Declaration of NATO Heads of State and July 5-6, 1990.

 Nye, “Nonproliferation: A Strategy,” Foreign vol. 56, No. 3, April 1978, pp. 601-623.
28 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 2-2—Force-Structure Choices Affecting the Defense Technology and

Industrial Base

National security policy choice Military force indications DTIB indications

Size and natureof contingency Size and capability of overall size of sustaining base, surge

planned for force and mobilization capacity

Urgency of dealing with Readiness of force, active/ Responsiveness, lead times

contingency reserve ratios, training tempo,

war reserves

Autonomy of action Degree of integration with allied Use of foreign technology, use of

forces, size and readiness of foreign production, cooperaforces, composition of force tive logistics planning

Qualitative or quantitative Performance and number of Sophistication of supporting techemphasis in weapons weapons nology base, allowed dependence on global commercial

technology

SOURCE: Office of Technology Assessment, 1991.

Table 2-3—Major Military Elements Under Several Proposed Defense Reductions

Comm. for Nat.

CBOi CBO Kaufmann iSec. and Admin. k 25%.

Forces Current “Alternative i“ “Alternative V“ “Case D“ Def. Budget Proj. Force Reductions

Divisions a . . . . . . . . . . . . . (21/11) b

(19/1 1) (12/8) (10/1 1) (10/10)j

22l

Carriers. . . . . . . . . . . . . . . . 14 6 9 12

Attack submarines. . . . . . . 9 2

d 7 2h

Tactical Air Wingsa . . . . . . (27/13)c

—

(27/13) (17/8) (15/12) (12/12)j 25

Missile submarines . . . . . . 34” 23 17 17 20

ICBMs . . . . . . . . . . . . . . . . . 1000 50 MX+500 SICBM 50 MX+500 MM-iii 100 MM-iii 950 MM 500

Bombers. . . . . . . . . . . . . . . 260g

97 B1 +132 B2 23 B52+97 B1 +15 B2 41 B1 97 B1+15 B2 200

a(active/reserve)

b Army (18/10) + Marine (3/1) divisions--does not include nondivisional assets. See CBO, Security Needs, p. 3, Mil Bal, pp. 17, 20.

c Air Force (24/12) + Marine (3/1) airwings. See CBO, p. 3 and Mil Bal, pp. 21-22.

d CBO, p. 46.

e Mil Bal, p. 16.

f Minimum reductions to meet expected START& CFE limits.

g Mil Bal, p. 16 (excludes FB-111s).

h CBO, p. 46.

i Kaufmann, TabIe 32. Kaufmann calculates force levels in terms of “division equivalents.”

J Excludes Marine forces.

k From OSD briefing, "Budget impact of Illustrative 25% Force Reduction,” June 1990.

I Active and reserves were not broken out.

“CBO” refers to Meeting New National Security Needs: Options for U.S. Military Forces in the 1990s, Congressional Budget Office (February 1990).

“Kaufmann” refers to William Kaufmann, Glasnost, Perestroika, and U.S. Defense Spending (Washington, DC: The Brookings Institution, 1990).

“Mil Bal” refers to The Military Balance, 1989-7990 (London: International Institute for Strategic Studies, 1989).

“Comm. for Nat. Sec. & Def. Budget Proj.,” refers to Restructuring the U.S. Military: Defense Needs in the 21st Century (Washington, DC: Defense Budget

Task Force of the Committee for National Security and The Defense Budget Project, 1990).

SOURCE: Office of Technology Assessment, 1991.

which refers to the level of training, the peacetime

operational and maintenance tempo, the required

stockpiles of ammunition and spare parts, and the

planned surge capability of the DTIB. Autonomy of

U.S. forces means the degree to which they can

operate without foreign forces, weapons, or bases

and infrastructure, and the extent to which the

Nation will allow itself to use foreign technology.

The desired performance edge of U.S. weapons

should determine, in part, the extent of the Nation’s

investment in defense R&D. These choices are listed

in table 2-2.

Several recent studies have proposed force reductions of various extent and speed, as summarized in

table 2-3. Most proposals envision at least a 25-

percent cut, and some sketch out 50-percent cuts,

usually over 7 to 10 years. How severe such cuts

appear depends on one’s view of the appropriate

baseline. Figure 2-1 shows overall U.S. defense

spending as a percentage of GNP since the beginning of the century and spending in 1990 dollars

since the beginning of World War II. There were

three major peaks in spending: World War I, World

War II, and the cold war mobilization begun in 1950.
Chapter 2—Threats, Forces, and Operations ● 29

Figure 2-l—United States Defense Spending

1910 20 30 40 50 60 70 80 90

Year

Billions of constant 1990 dollars

World War II

900 “

800 - i

700 “

600 -

500 - Korean War Vietnam War “Reagan” buildup

400 -

I

Cold war minimum

I

300 -

200 - _P’q%’nge

proposals

100- Post-war minimum

o I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I f I I I I I I I I I I I I I I I I I I 1 I I I 1

1940 45 50 55 60 65 70 75 80 85 90 95

Year

SOURCES: Budget of the United States Government Fisca/ Year 1992, Historicxd Tab/es (Washington, DC: U.S.

Government Printing Office, 1991); Stephen Alexis Cain, Ana/ysis of the FY 1992-93 Defense Budget

Request with Historica/ Budget 7“es (Washington, DC: Defense Budget Project, 1991); William W.

Kaufmann, G/asnost, Perestroika, and U.S. Defense Spending (Washington, DC: The Brookings

Institution, 1990).

Spending during the cold war had a floor of over spending in 1990 dollars gradually returned to the

$200 billion in 1990 dollars. Lesser peaks in cold-war minimum, and the expanding economy

spending over the cold-war minimum were associ- resulted in a downward trend in percentage of GNP

ated with the Korean and Vietnam Wars and the devoted to defense. If one believes that the cold-war

peacetime buildup of the eighties. After these peaks, minimum is still appropriate, then some proposed
30 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Box 2-A—Forecasts of Future Forces

The Electronic Industries Association (EIA) makes periodic forecasts of defense spending that are widely

respected for their accuracy. The latest EIA study,l which was completed after the Iraqi invasion of Kuwait but

before Desert Storm, predicts that overall U.S. defense spending will decline steadily to about $200 billion (in 1991

dollars) by the turn of the century. It predicts force cuts of more than 40 percent in the Army and the tactical Air

Force, about 40 percent in the Navy, and about 25 percent in the Marines and the strategic nuclear forces.

The President’s 1992 budget request calls for a reduction from 18 to 12 active Army divisions by 1995. Both

the budget request and the EIA study foresee less forward basing and relatively greater emphasis on light forces

rather than heavy armored forces. Accordingly, the Army plans very limited procurement of new armor. Despite

the Army’s decision to proceed with the next-generation LH helicopter, the ultimate investment is uncertain. Some

experts contend that upgrades of existing helicopters would be adequate for the foreseeable future and much

cheaper. 2

DoD plans to reduce the total number of Navy warships by 17 percent to 451 by 1995 but would eliminate only

a single aircraft carrier, from 13 to 12. The EIA study predicts a 32-percent cut in active Navy forces by the year

2000, down to a 400-ship navy with 10 aircraft carriers. Budget cuts and arms control treaties will almost certainly

limit the Trident submarine fleet to 18 boats. Current procurement plans for the SSN-21 Seawolf-class attack

submarine call for about 15 boats by 2000, half the production rate planned for in 1989.3 The recent cancellation

of the Navy’s A-12 carrier-based attack plane will, of course, have a major effect on naval aircraft procurement. At

least in the short term, the cancellation will result in more attention to upgrading existing models.

For the Air Force, DoD plans call for a reduction from 24 to 15 active tactical airwings and from 12 to 11 reserve

airwings. The EIA study foresees a 41-percent cut in active forces, with a disproportionate share in tactical air,

shifting the relative emphasis to strategic missions. The President has asked for continued funding for the B-2

strategic bomber, but congressional support is very thin. Congress has also eliminated funding for rail-garrison

basing of the MX intercontinental ballistic missile and, while no final decision has been made, there is support for

only one new ICBM, either the MX or the Small ICBM (Midgetman). The one area of growth anticipated by the

EIA study is in Air Force airlift capacity.

IEIw~oticS ~dus~es Association Defense Electronics Market Ten-Year Forecast, U.S. Department of Defense ad Natio~l

Aeronautics and Space Administration Budgets, FY 1991 -FY-2000, Oct. 16, 1990.

@xj co~essio~ ReseMch Service, A4ajor Legislation of the Congress, s~ my issue, IOlst Cong., December 1990, MLC-088.

%bid., MLC-1OO.

cuts could seem dangerously large. But if one reductions by the end of the century may be closer

believes that the pre-World War II spending levels

and the post-war peacetime minimum are more

appropriate to the current security environment, then

a 25-percent cut would merely return us to ‘‘normal’ cold-war levels, while a further 25-percent cut

may be a justifiable response to the end of the cold

war.

When these proposed force reductions were first

presented, a 25-percent reduction appeared most

likely, while a 50-percent reduction seemed radical.

Since then, however, the President presented his

fiscal 1992 defense budget request, which proposes

a 30-percent reduction in budget authority between

1985 and 1996. (Reductions in actual outlays would

be smaller because all of the money authorized in

previous fiscal years has not yet been spent.) As the

evaluation of future U.S. defense needs evolves,

to the previously “radical” 50-percent cuts than to

25-percent cuts (see box 2-A).

Most proposals for cutting forces would achieve

reductions by retiring old inventory and terminating

current production with those items already started

(hence the proposal for 15 B-2 bombers) or contracted for at the time of the proposal (hence 17

Trident submarines). Thus far, not enough attention

has been given to maintenance of the DTIB during

the transition.

While all force-structure decisions will have some

effect on the DTIB, a few key decisions may present

particular challenges. Reductions in the heavy armor

force and completion of force modernization without additional upgrades could result in a complete

halt in the production of heavy armored vehicles.

Similarly, the production of the Trident submarine
Chapter 2—Threats, Forces, and Operations ● 31

Figure 2-2—Active Armed Forces Personnel, 1988

Soviet Union

China

United States

India

Vietnam

Iraq

Turkey

North Korea

Iran

South Korea

France

West Germany

Pakistan

Egypt

I taly

Poland

Syria

Taiwan

United Kingdom

Brazil —-+—-~ —––

0 1 2 3 4

Millions of persons

SOURCE: U.S. Arms Control and Disarmament Agency.

will end with the additional boat funded this year.

Some attention must therefore be given to the

problem of how to maintain the skills, knowledge,

capabilities, and equipment that will be required to

develop and produce major categories of weapon

systems or their replacements. If the United States

produces no bombers, tanks, or submarines for a

decade, how much will it cost to restart production,

and would the Nation lose the ability to make such

platforms in the future?

The sections below examine in more detail the

tradeoffs and the risks associated with various

choices about force structure, including size and

type of contingency, force readiness, autonomy, and

weapon performance. There then follows a discussion of the implications of these choices for the

DTIB.

Size and Type of Contingency

The size and structure of future U.S. forces will be

influenced by judgments about the size and type of

military contingencies that may face the United

States, the likelihood of these contingencies, and the

risks of not being able to handle them. Examining

the personnel under arms and defense budgets of the

leading military powers provides some perspective

on the potential military challenges facing the

United States.

Perhaps the most straightforward comparison of

possible threats is total personnel under arms (see

figure 2-2). By this measure, the United States does

not stand out clearly, nor is there a sharp cut-off that

divides the great from the small. Because the United

States expects to be able to fight across the globe,

much of its personnel is in the Navy and combat

support. American combat ground forces are, therefore, relatively smaller than figure 2-2 would suggest. Moreover, political constraints on casualties

means that U.S. involvement in the Third World

could require the use of massive, overwhelming

force to assure a quick, relatively painless victory, as

it did in the Persian Gulf War. Yet even if the United

States halved its total number of personnel, it would

still count among the largest forces in the world and

would lose relative rank only to India and Vietnam.

A better comparison of capability in modem

conventional war is total military resources, which

corresponds to the investment in modem weaponry

and the skilled manpower to operate it. Although

there is great variation in costs from nation to nation,

particularly manpower costs, the armed forces of

advanced industrial nations are trained to operate

sophisticated weapons. Thus, financial measures

indicate the extent of capital investment in modem

weapons and skilled manpower and can provide a

gross assessment of military strength. Figure 2-3

shows military spending of those countries with the

largest military budgets. The United States and the

Soviet Union overwhelm every other nation’s military spending. Further, the second tier is composed

predominantly of U.S. allies: the United Kingdom,

France, Germany, Japan, Italy, and Saudi Arabia.

All of the U.S. force structure studies summarized

in table 2-3 were completed before the recent war in

the Persian ’Gulf. But since these proposals presumably considered contingencies like war against Iraq,

Figure 2-3--Major National Military Budgets, 1988

United States

Soviet Union /~///////////&///////// a

France

West Germany

United Kingdom

Japan

China

Italy

Poland

Saudi Arabia

Iraq

Iran

Canada

Czechoslovakia

India

Romania

South Korea

Spain -

Bulgaria 1 1 I

o 100 200 300

Billions of 1988 dollars

SOURCE: U.S. Arms Control and Disarmament Agency.
32 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

they should still be relevant to long-term planning.

A reasonable test is whether the forces in each of

these proposals could have handled the requirements

of that conflict. Even for the proposed U.S. force

structure with the deepest cuts, and even though Iraq

was—at least on paper--one of the most challenging

cases, the answer is a qualified yes. Coalition forces

would still have been victorious over Iraq, but U.S.

military responses would have taken longer, more

reliance would have been placed on reserves or on

allies, fewer U.S. forces might have been held in

reserve to deal with other contingencies, and the

actual operational plan might have differed.

A more critical policy issue than the size of a

Third World contingency is how many such contingencies the United States must be able to handle at

once. The difference between using Iraq or North

Korea as a nominal planning threat might be small,

but the difference between being able to handle Iraq

or North Korea and being able to handle both

contingencies simultaneously is bound to be close to

a factor of two. The policy decision is how much the

Nation is willing to pay for an insurance policy

against U.S. involvement in two concurrent wars in

the Third World.

In addition to force size, analyses of potential

contingencies will require decisions about the composition of the forces needed to fight in different

types of theaters. Will there be a change in emphasis

among land, air, and sea forces, or between conventional and strategic forces? The emphasis could also

shift within the Services, for example, from heavy to

light armored forces in the Army or from submarine

to surface forces in the Navy. Such changes in force

size and composition will have important implications for the DTIB.

Force Readiness

After deciding the size and composition of U.S.

forces, the next most important policy decision is to

determine their state of readiness. As a military term,

readiness refers to the extent to which the force is

sufficiently well-trained and equipped to be committed to combat quickly and to perform effectively.

According to the Department of Defense (DoD), the

factors determiningg readiness include the quality,

training, and manning levels of military personnel;

the condition and maintenance of equipment; the

training of units and crews; the quality of command,

control, communications, and intelligence support;

the location and mobility of forces; and logistics

support.14

Decisions about readiness will require an analysis

of costs and benefits. While full levels of troops,

modem equipment, and realistic training are clearly

expensive, the costs of being unready are harder to

assess. The greatest danger arises when a hostile

power can attack so quickly and with such force that

the victimized state cannot recover in time to defend

itself. This situation characterizes the vulnerability

of small nations the world over. Fortunately, the

United States is large, militarily powerful, and

separated from potential enemies by great oceans,

and thus much less vulnerable to a conventional-as

opposed to nuclear-surprise attack. The United

States may pay a price for not being ready to meet

conventional aggression, but its national survival

will not be in jeopardy.

Nevertheless, wars and threats can flare up

quickly in places where the United States has vital

interests. While it is not always necessary to respond

immediately to aggression, costs can sometimes be

incurred by waiting. The North Korean attack on the

South in 1950 provides an example. Had the United

States completely lost its foothold on the Korean

peninsula, the cost—both in materiel and lives-of

later making a “forcible entry” would have been

much higher. Whatever the level of force readiness

the Nation chooses, it must be matched by the

responsiveness of the DTIB.

Autonomy of Forces

The degree of autonomy of U.S. forces really

entails two questions. First, in how wide a range of

contingencies should U.S. forces be able to operate

without allied support? The required level of autonomy is determined by the extent the United States is

willing to depend on allies to defend common

interests. In the past, the United States has often

sought to fight alongside allies for political reasons,

even when it was not required militarily. Second,

and more relevant to the DTIB, to what extent should

the weapons employed by U.S. forces be products

solely of the U.S. defense industrial base? The

degree of autonomy of the U.S. base has varied

greatly in the past, from nearly complete dependence

l’$Fr~ Cmlucci, Secret~ of Defense, Annual Reporr to the COng~e~& fi!lcd yem 19N, p. 7.
Chapter 2—Threats, Forces, and Operations ● 33

SAUDI ARABIA

Us. Saudi

Credit: Ollice of Technology Assessment

The United States has fought alongside allies whenever possible; the ground campaign to liberate Kuwait, shown in this map, was

only the most recent example. Thus, allied contributions and materiel requirements should be figured into U.S. contingency planning.

on allies for heavy equipment in World War I, to an

integrated Anglo-American production base in World

War II, to the more autonomous base of today. The

United States is fortunate to be allied with most of

the leading industrial nations; otherwise, militarytechnical cooperation would be almost impossible.

A decision to exclude foreign production from

U.S. weapons would have important consequences

for the DTIB. While military planners may prefer

that the base not become any more dependent on

off-shore production than it already is, the increasing

globalization of industry and technology may make

defense industrial interdependence with other nations difficult to avoid or even track.

Desired Performance of Weapons

Throughout the cold war, the United States sought

to match greater Soviet numbers with fewer but

higher performance weapons. This approach has

been followed for so long that today it has become

nearly axiomatic. The Nation should not forget,

however, that this procurement strategy is a policy

choice and not an inevitable result of circumstances.

A comparison of populations and productive capacity reveals that NATO certainly had the option of

matching the Warsaw Pact man-for-man and tank-fortank, had it so desired. The United States has chosen

high-performance forces for a variety of reasons,

including the desire to minimize battlefield casualties and expected cost-effectiveness. But the quality

versus quantity debate will never go away. The

country may want better tanks and airplanes than

those of an adversary, but how much better? Is twice

the performance preferable to a two-to-one numerical advantage?

The waning of the military competition with the

Soviet Union could have an important effect on the

performance requirements of U.S. weapons. Since

the end of World War II, U.S. weapon performance

has been measured against Soviet weapons. In the

new security environment, however, more emphasis

may be placed on low maintenance costs and high

reliability for systems that might be in inventory for

many years and used against technologically less

sophisticated opponents. Moreover, as security concerns shift toward the Third World, the United States

will become increasingly likely to face hostile forces

armed with U.S. or European weapons. For this
34 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Photo credit: U.S. of Defense

The United States has emphasized high-performance

weapons, such as this wire-guided TOW missile, rather

than depend on sheer quantity. This strategy requires an

active research and development program.

reason, choices relating to the performance of U.S.

weapons in the future maybe affected by the extent

of controls on international arms transfers. The

performance required of U.S. weapons will in turn

determin e the requirements placed on the DTIB and,

in particular, continuing levels of defense R&D.

EFFECTS ON THE

INDUSTRIAL BASE

The likely characteristics of future U.S. forces are

listed in table 2-4. While it is impossible to predict

the nature of U.S. forces a decade hence, this

analysis assumes that overall force structure will

decline by nearly half over that period. Almost all

possible force structures place relatively greater

emphasis on reserves, but future force readiness

levels remain uncertain. While military planners

Table 2-4-Characteristics of Future U.S. Forces

. Smaller active and ready reserve forces

 Less forward basing, greater strategic mobility

. Continuing weapons performance advantage

. Substantial nuclear capability

● Chemical and biological defense capabilities

. Greater dependence on mobilization

SOURCE: Office of Technology Assessment, 1991.

express a preference for readiness over force size, in

the only vote that counts-the Service planning

documents-they continue to prefer funding major

weapon systems even at the expense of readiness.

Finally, there is every indication that the United

States will want to maintain superiority in weapon

performance over that of potential adversaries,

which will require preserving the U.S. lead in the

requisite technologies.

How the transition to the future force structure is

carried out is at least as important for the DTIB as the

size of the reduction. To provide a simple example,

if a force is made up of a uniform age distribution of

weapons with a 20-year lifetime, a reduction of

one-half can be effected over 10 years simply by

halting procurement and retiring the weapons as

they wear out. This approach is appealing because of

the procurement money saved, but what happens to

the production base in the meantime? For some

systems, this illustration is not too far from reality.

A reduction in Army heavy divisions and Navy

carrier battle groups could result in a hiatus of

several years in tank and aircraft-carrier production.

While terminating production with the expectation

of restarting it some years into the future maybe the

only affordable approach, careful attention must be

given to the problem of preserving critical skills,

facilities, and technology during the intervening

period.

Apart from the size of the force, how the force will

be used will also affect DTIB requirements. For

example, the surge capability of the base should be

matched to the readiness of the forces, how long they

may need to be sustained, and the size of stockpiles

of materiel. Ironically, if active forces and munitions

stockpiles get smaller-making industrial surge

necessary for a greater number of contingencies—

surge requirements may increase just as baseline

production goes down.

Surge capability is also related to the problem of

optimizing production efficiency. In the past, surge

capacity was rarely funded explicitly; instead, some
Chapter 2—Threats, Forces, and Operations ● 35

extra capacity was hidden in the inefficiency of

varying production rates, which often gave factories

considerable surplus capacity. As total production

diminishes, however, economies of scale are less

likely to be realized, requiring evermore attention to

production efficiency. One way to increase the

efficiency of peacetime production is to avoid

year-to-year variation in production rates and thereby

eliminate surplus capacity, yet doing so would

reduce surge capability in a crisis. This observation

suggests that in the future, explicit funding of surge

capacity for selected items will be required.

The desired level of autonomy of U.S. forces will

affect DTIB requirements in two ways: by influencing decisions about the overall size and composition

of the force, as described above, and by determining

the allowed degree of interdependence of the DTIB

with the global industrial base. Autonomy will not

bean all-or-nothing decision. The appropriate level

of national autonomy will vary for each type of

weapon; foreign dependence may be acceptable for

sidearms but never for nuclear warheads.

Even when autonomy is desired, it may be

difficult to achieve. As the civil economy becomes

more internationalized and parts of the DTIB come

to depend more on the civil economy, it may simply

not be possible to maintain complete autonomy in

many areas. Moreover, foreign dependence does not

necessarily equate to foreign vulnerability: if the

United States has a dozen different suppliers of some

critical part spread around the globe, the chances of

a cutoff are slim, and indeed, the supply maybe more

reliable than from a single domestic producer. Still,

there are some critical technologies for which the

Nation should preserve a domestic knowledge base

and production capability.

Finally, future weapon performance goals will

affect the requirements of the DTIB. The main risk

associated with a “low-tech” approach is the

possibility of technological surprise. If a potential

adversary makes unexpected technical breakthroughs

—which in the past have included radar, the transistor, and the atomic bomb--the military and

strategic implications for the United States could be

severe. The Nation will therefore wish to maintain

some ongoing weapons R&D as a hedge against

such an eventuality.

If the policy decision is made to continue emphasizing weapon performance, the Nation will require

a continuing robust research and development effort.

Yet there is no reason to maximize performance for

its own sake; it must have some clear utility from a

military operational perspective. At any given level

of technology, better performance is available by

paying more, but there is a point of diminishing

returns. For example, the last 10-percent improvement in performance may be extremely expensive

yet contribute little to combat effectiveness.

Since there is little doubt that future procurement

of large expensive weapon platforms will be substantially reduced for a period of several years, R&D

efforts should concentrate more on upgrading and

retrofitting existing platforms to increase their

performance, life expectancy, or reliability. Emphasis could also be shifted from developing new tanks,

ships, and aircraft to improving their subsystems and

the munitions they carry. Such shifts in R&D focus

will also affect production. For example, relatively

greater resources may go to production of munitions

rather than new platforms, and of improved components and subsystems rather than complete weapon

systems.

This chapter has reviewed important future choices

about U.S. military force structure and discussed

their potential effects on the DTIB. The next two

chapters describe the structure of the DTIB and

examine current trends and problems that must be

taken into account in planning the transition to the

future base.
Chapter 3

Structure of the Current Base
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

STRUCTURE OF THE CURRENT BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Tiers of the Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Ownership Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...,+.,. . . . . . . . . . . 44

Defense Industrial Sector Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Functional Area Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..*. 48

MANAGEMENT OF THE BASE

.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Responsiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Boxes

Box Page

3-A. Differences Between Primes and Subtiers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

3-B. Department of Defense Manufacturing Technology Program . . . . . . . . . . . . . . . . . . . . 53

Figures

Figure Page

3-1. Dual Pyramid Demand Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*...,.. ...*,.,. . . 39

3-2. Relationships Among Defense Sectors and the Broader National Industrial Base.. 40

3-3. Tiers of the Defense Technology and Industrial Base . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3-4. Department of Defense Research and Development Process . . . . . . . . . . . . . . . . . . . . . 49

3-5. Allocation of Research and Development Funding by Function,

Fiscal Year 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

3-6. Allocation of Research and Development Funding by Performer,

Fiscal Year 1990. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3-7. Funding of Manufacturing Technology (MANTECH) Program, 1980-91 . . . . . . . . . 52

3-8. Procurement of Major Weapon Systems, Fiscal Years 1974-93 . . . . . . . . . . . . . . . . . . 56

3-9. Management Structure of a Typical Weapon Acquisition Program . . . . . . . . . . . . . . . 59

3-10. Department of Defense Management Structure for Research and Development . . . 60

Tables

Table Page

3-l. Top 25 Department of Defense Contractors, Fiscal Year 1989...........+.. ... ...42

3-2. Department of Defense Foreign Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

3-3. Defense Share of Selected U.S. Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

3-4. Defense Procurement Funding (Budgetary Authority) for Fiscal Years 1990-93 . . . . 55

3-5. Principal Maintenance and Repair Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Chapter 3

Structure of the Current Base

INTRODUCTION

The defense technology and industrial base (DTIB)

has two broad functions. The first is to conceive of,

develop, produce, maintain, and upgrade both modern weapon systems and supporting equipment in

peacetime; the second is to respond to crisis or war

with increased production of current materiel and the

development of new systems.1 These objectives are

to some extent in competition for limited resources,

and one of the primary challenges of DTIB planning

and management is finding the proper balance

between the two.

In considering the transition to the future DTIB,

it is important to understand the overall structure and

condition of the current base, including both its

strengths and its weaknesses, and the policies that

have led to the current situation. This chapter draws

together the findings of numerous assessments over

the past decade, as well as information from surveys

and discussions conducted by OTA. The chapter

provides insights into the current structure of the

base, explains the differing requirements of elements of the DTIB, and outlines its current management structure.

STRUCTURE OF THE

CURRENT BASE

The DTIB can be broadly defined as the combination of people, facilities, institutions, and skills

required to design, develop, manufacture, test, and

maintain the weapons and supporting equipment for

the U.S. armed forces. It is composed of three

functional elements: research, development, and

engineering; production; and maintenance and repair. The base comprises the U.S. and Canadian

defense industries, as well as offshore foreign firms

that supply goods and services to North American

manufacturers. 2

The broad ‘guns v. butter” tradeoffs that must be

made at the national level are suggested by the

dual-pyramid demand model in figure 3-1. As

military threats increase, goods and services are

shifted from civilian to defense use; as threats

recede, demand shifts back to the civil sector. For

example, defense demand increased dramatically

relative to civil demand during World War II, when

defense spending went from 1.7 percent of GNP in

1940 to over 39 percent in 1944.3

Under the wartime conditions existing from 1942

through 1945, this massive shift in allocation was

tightly controlled by the Federal Government. During periods of reduced external threat, market

Figure 3-l—Dual-Pyramid Demand Model

Defense demand Civil demand

End Aerospace, electronics (e.g., computers,

product telecommunications, software), shipbuilding,

automotive, construction equipment,

farm machinery, etc.

o

Subtier Forgings, castings, ball bearings, machine tools,

robotics, semiconductors, semiconductor

equipment, etc.

6

Basic Steel, petrochemicals, metals (e.g., aluminum,

titanium, copper mining), ceramics, composite

fibers, fiber optics, etc.

u

Inputs Raw materials, energy, capital, technology,

scientific/skilled manpower, management

SOURCE: Roderiek L. Vawter, Foreign Dependency and Foreign Vu/nerabdify: Part 1, A Survey of the Literature (Washington, DC:

Mobilization Concepts Development Center, National Defense

University, Ft. McNair, September 19S6).

Iu.s. cong~~~, offlc~ of ~~olo~ As~~sm@ Adjusting t. a New Secun”ty Enviro~nt: The l)~eme Technology and Indusm”al Base

Challenge, OTA-BP-ISC-79 (Washington, DC: U.S. GOV ernment Printing ~lce, February 1991), pp. 4-6.

me integrated U.S.-Canadian defense industrial base has evolved over a period of four decades because of its benefits to the security and economic

interests of both countries. Guidelines for this collaboration laid down in numerous letters of agreement and memoran& of understanding known

collectively as the Defense Development and Defense Production Sharing Arrangements (DD/DPSA), have led to the emergence of a North American

Defense Industrial Base. For further discussion see App. I.

S(_Jfflce of M-gement~d Budg@ Hi~ton”~aJ T~lesB~getof the u~ite~state~ Govern~n~, ]99(.) ~&@k)Q DC: GOV ernmentprinting (Mice,

1989), table 6.2 “Composition of Outlays in Percentage ‘Mms: 19401994,” p. 132.

–39–
40 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

incentives are more often used to reallocate resources. Industrial production is not a zero-sum

game, and a shift of resources to defense does not

necessarily entail an absolute loss to the civil sector.

In periods of increased security threats and improving economic conditions, both the defense and civil

bases can increase in size, as occurred during the

Korean and Vietnam wars and the peacetime military mobilization for the cold war.

The complexity of the DTIB means that no single

view or model is adequate for policy development.

Figure 3-2 indicates some of the relationships

between the defense elements and the broader base,

as well as among the components. The DTIB has its

source in the global science and technology base and

is fed by the national industrial base. Because of

legislation, however, the national base has evolved

separate elements that perform defense functions.

Combining views from several perspectives

yields a more comprehensive picture of the DTIB

and its relation to the larger national industrial base

that is useful for considering policy choices and the

implications of those choices. The following sections describe the DTIB from four perspectives:

1.

2.

3.

4.

the tiers associated with the weapon development and assembly process (primes, subcontractors, and suppliers);

ownership (private and public);

different industrial sectors (e.g., shipbuilding

and electronics); and

functional areas that correspond generally to

the steps of the procurement cycle (R&D,

production, and maintenance).

Tiers of the Base

The DTIB is part of the larger national industrial

base and increasingly a part of a global industrial

base. Figure 3-3 illustrates the structure of the

defense base from the standpoint of the weapon

development and assembly process. The larger

truncated pyramid represents the overall North

American industrial base (both civilian and defense

elements), while the smaller embedded pyramid

contains defense-specific elements. A 1988 report

by the Under Secretary of Defense for Acquisition

noted that the DTIB ‘‘generally comprises the same

manufacturers that produce goods for the general

Figure 3-2—Relationships Among Defense Sectors

and the Broader National Industrial Base

INDUSTRIAL SECTORS

Civil AEROSPI

‘i’ita”+s ;=’;’”

INDUSTRIAL BASE

TECHNOLOGICAL ROOTS

SOURCE: Office of Technology Asseeement, 1991.

public. . . . [The Defense] Department depends on

virtually every sector of the manufacturing base for

materiel.’ While figure 3-3 highlights the interrelationship between the DTIB and the overall industrial

base, it fails to capture adequately the suppliers and

producers located outside of North America.

Both the larger national technology and industrial

base and the embedded DTIB are fed by inputs that

include raw materials, manpower, and capital. At the

lowest level are basic industries such as steel and

aluminum; at the middle level are industrial producers of items such as forgings, castings, and semiconductor chips; and at the top level are final assemblers

of end-products such as military or civilian aircraft.

Elements of a single firm might operate at all three

levels.

4Repofi to the se~~ of Defense by the Under Secretary of Defense (Acquisition), Bolstering DeJense Indusm”al Competitiveness, JulY 1988, p. v.
Chapter 3--Structure of the Current Base . 41

Figure 3-3-Tiers of the Defense Technology and Industrial Base

4

Prime contractors and

assemblers

Subcontractors and

component-makers

Parts, capital equipment,

and raw material suppliers

1/ \\// Truncated pyramid

SOURCE: Office of Technology Assessment, 1991.

One of the chief concerns expressed in interviews

conducted by OTA and numerous recent studies is

that the national base, viewed from the standpoint of

the weapon development and assembly process,

increasingly lacks key supporting firms. While this

concern appears to have merit in some sectors, in

aggregate the national base can still be thought of as

a truncated pyramid of supporting firms and capabilities that potentially can be used for weapons

development and production. How firms might be

moved from being potential to actual producers is a

key policy question.

Firms within the DTIB are often divided into three

tiers according to size and function: 1) large prime

contractors acting as systems integrators and assemblers; 2) subcontractors and component manufacturers; and 3) parts, capital equipment, and material

suppliers. This division is particularly useful in

considering alternative DTIB policies, since many

policies appropriate to large prime contractors are

not suitable for supporting subtier firms and material

suppliers.

Prime Contractors

The top tier of the defense industrial pyramid

consists of large prime contractors such as General

Dynamics, McDonnell Douglas, and Lockheed,

= Total national

industrial base

Pyramid = Defense base

which perform the overall assembly and integration

of weapon systems, as well as some parts fabrication

(table 3-l). Studies indicate that 40 to 60 percent of

defense procurement funds for any particular weapon

system stays with the prime contractors, while the

remainder is passed on to supporting subcontractors. 5 Prime contractors generally retain large design

and engineering staffs, which conduct applied research and development and also perform some of

the more basic R&D.

While some prime contractors are highly dependent on defense work, others are more diversified. In

1989, for example, Department of Defense (DoD)

contracts comprised 73 percent of total revenue for

General Dynamics, 62 percent for McDonnell

Douglas, 57 percent for Martin Marietta, and 64

percent for Grumman. For more diversified fins,

DoD contracts comprised a smaller share of total

revenue, including 18 percent for United Technologies, 16 percent for Rockwell International, 15

percent for Boeing, 13 percent for Westinghouse,

and 11 percent for General Electric.6 As a group,

prime contractors are more international in outlook

than smaller, more specialized firms in that they are

willing to source goods and services from abroad,

and also seek to export.

5~q= s. G~l~r, &~r&~g f)#~~e (c~bfidge, ~: ~~chu~tts hsti~te of mtiolo~ hXS, 1989), p. 247.

~om Shoop, “The Top 25 Government Contractors,” Government Executive, vol. 22, No. 8, August 1990, pp. 3244, and 123-132.
42 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 3-l—Top 25 Department of Defense Contractors,

Fiscal Year 1989

Total DoD

Rank Parent company ($ billion)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

McDonnell Douglas . . . . . . . . . . . . . . . . . . . . ..... $8.99

General Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . 7.28

General Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.87

United Technologies . . . . . . . . . . . . . . . . . . . . . . . . 3.54

General Motors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.38

Martin Marietta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.35

Raytheon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.29

Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11

Lockheed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.56

GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35

Grumman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35

Rockwell International . . . . . . . . . . . . . . . . . . . . . . 2.02

Litton Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.99

Westinghouse Electric . . . . . . . . . . . . . . . . . . . . . . 1.66

Honeywell (since 1990, Alliant Techsystems) . 1.54

Textron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.41

TRW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.30

IBM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.26

Ill- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25

Unisys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.02

Gibbons, Green & Van Amerongen . . . . . . . . . . 0.95

Allied-Signal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.90

Tenneco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.89

Avondale Industries . . . . . . . . . . . . . . . . . . . . . . . . 0.88

FMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.79

NOTE: Rankings are based on prime contracts of $25,000 or more for the

Department of Defense.

SOURCE: James Kitfield, “Stepping Back From Reform,” Government

Executive, vol. 22, No. 8, August 1990, pp. 24-25.

Subcontractors

The middle tier of the defense industrial pyramid

is composed of subcontractors that manufacture

major subsystems and components of weapon systems, such as radars, computers, engines, and

electronics. These firms, including Loral and Alliant

Techsystems (formerly Honeywell), vary greatly in

size. A subcontractor might be a large firm (e.g.,

Avco), a subsidiary of a major defense contractor

such as General Electric Aerospace, or a government

organization such as an Army arsenal that supplies

gun tubes to a prime contractor as governmentfurnished equipment.

A survey of prime defense contractors by the Air

Force Association indicated that their respondents

each purchased subcomponents from an average of

more than 1,300 subcontractors and vendors, both

domestic and foreign. The DDG-51 Aegis destroyer

program depended on more than 500 equipment

Photo credit: Royal 

Artillery shells for 155mm howitzers are manufactured by

Royal Ordnance of Great Britain, one example of the

international defense technology and industrial base.

vendors, and one of these vendors, GE, relied in turn

on more than 1,200 suppliers.7 Subcontractors

conduct extensive R&D related to components.

Over time, they have developed considerable expertise in critical technologies and survive by that

expertise. They are, therefore, more concerned than

the prime contractors about technical data rights and

any attempt by the government to gain access to

commercially developed technology that might be

embedded in their defense products. They are less

international in outlook and argue that they have

been hurt by the growing trend of prime contractors

to transfer technology offshore and to source abroad

(see box 3-A).

Suppliers

The bottom tier of the pyramid is composed of

suppliers of parts and materials, including electronics packages, integrated circuits, batteries, and

bearings. Many of these firms produce “dual-use”

equipment and supplies, such as fasteners and

materials, that are essential to both military and

civilian applications. As a group, supplier firms are

 Base 

VA: The Aerospace Education Foundation, 1988), p. 65; and Naval Sea Systems d, United States Shipbuilding Industry, briefing papers, July 1990.
Chapter 3--Structure of the Current Base ● 43

OTA DEFENSE INDUSTRY SURVEY

Box 3-A—Differences Between Primes and Subtiers

The survey revealed a number of differences in approach to dealing with reduced defense budgets between

large prime contractors and smaller subtier fins.

International

● primes tend to support international sales, talk about the global nature of the defense technology and industrial

base, and report that they source widely abroad. They are generally skeptical about tracking foreign dependency

and sources of items.

● Subtiers are more supportive of Buy-American provisions, argue that even R&D should be oriented toward U.S.

firms rather than abroad, complain about the negative effects of offset requirements, and express greater concern

about loss of technology to foreign competitors.

Diversification

● Primes hope to diversify in defense work as well as non-defense. They generally see defense business expansion

(possibly through diversification) as a requirement to maintain stock value in the face of a reduced defense budget.

Diversification into civilian areas is generally approached through acquisition.

● Subtiers note a threat from primes moving into technical areas previously left to smaller, more specialized firms.

Subtiers often have few resources to diversify into civilian work and stress the difficulty of making the transition,

especially in a recession. In order to diversify, they tend to pursue teaming arrangements with other fires rather

than acquisitions.

Commitment to Defense

● Primes generally express a continued commitment to defense. However, firms with a solid base of non-defense

business note the difficulty of doing business with DoD and appear to be somewhat less committed to defense

work.

. Subtiers’ responses are mixed. Several hope to leave the defense sector, and some already have done so. They

contend that the cost of doing business with DoD is far too high in light of potential returns.

Government Action

. Primes generally oppose government intervention and advocate letting the market decide which firms will survive

the downsizing of the base.

● Subtiers see more need for intervention to protect them from international competition and from U.S. primes

moving into their business sector during downsizing.

more diversified and are linked directly to the ing agreements and through government-sponsored

broader national industrial base.

Foreign Sources

The DTIB extends beyond the borders of the

United States to include subcontractors and suppliers from Canada and other countries. Most of the

foreign contracts listed in table 3-2 are for services

and fuel to support U.S. forces overseas, but many

key components and some weapon systems are

sou.reed abroad. In addition, international exchanges

of technology take place through commercial licensor private industrial collaboration. Although a few

cooperative programs such as the codevelopment of

the FSX fighter with Japan have attracted much

attention and criticism, the military services manage

a host of other intergovernmental exchanges of

technology relating to propellants, explosives, airframe

design, and other areas-almost all without controversy. Company-to-company collaborations are also

increasing. Firms collaborate across borders to gain

access to foreign markets and technology, or to meet

foreign governments’ insistence on offset arrange-
44 e Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 3-2—Department of Defense Foreign Contractors

Fiscal 1989

awards Market share

Ranka Parent company Parent location ($ 000s) (percent)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Federal Republic of Germanyb

Royal Dutch Petroleum

SNECMAC

Canadian Commercial Corp.d

European Utilities COS.

e

MIP Instandsetzungsbetrieb

Philips Gloeilampenfabrieken

CAE Industries

Nisshin Service

Bahrain National Oil

British Aerospace

Kuwait National Petroleum

N.J. Vardinoyannis Group

Selm Servizi Elettrici Montedi

Imperial Chemical Industries

Daimler-Benz

FN Fabrique Nationale De Herst

Okinawa Electric Power

Greenland Contractors

General Electric OLC

Bell Canada Enterprises

Aral AG

Compania Espaniola De Petroleos

Netherland Ministry of Defense

Rafael Armanents Development

---- --- - --, Bonn, Germany

The Hague, Netherlands

Paris, France

Ottawa, Canada

—

Germany

Eindhoven, Netherlands

Toronto, Canada

Japan

Bahrain

Bristol, United Kingdom

Safat, Kuwait

Athens, Greece

Milan, Italy

London, United Kingdom

Stuttgart, Germany

Herstal, Belgium

Okinawa, Japan

Greenland

London, United Kingdom

Montreal, Canada

—

—

Netherlands

Haifa, Israel

$350,498

304,543

258,650

253,478

173,258

166,329

135,064

125,287

109,619

101,043

100,113

96,720

88,880

85,005

83,061

71,822

58,379

53,477

46,964

42,671

42,619

40,180

34,545

32,604

32,570

0.2%

0.2

0.2

0.2

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

a Rankings are based on R&D, service, and production prime contracts of $25,000 or more received by foreign entities.

Market shares are of all Department of Defense contracts.

b The Federal German Government acts as a middleman for contracts involving U.S. bases in Germany.

C SNECMA’S contract awards are from CFM International, a joint venture with General Electric of Fairfield, Conn.

d canadian Commercial Corp. is a Canadian government agency that processes DoD contracts for Canadian

companies.

e European Utilities Companies represents the aggregate of utilities contracts for U.S. bases in Europe.

SNECMA = National Company for the Design and Construction of Aircraft Engines

SOURCE: James Kitfield, “Stepping Back From Reform,” Government Executive, vol. 22, No. 8, August 1990, p. 26.

ments, which may involve coproduction and technology transfer.8

Ownership Perspective

A second policy perspective is provided by

categorizing according to ownership the various

companies and organizations that make up the

DTIB. The majority of the base is privately owned

and operated, although the government may own

some of the equipment at particular facilities. A

matter of some concern is the increasing foreign

ownership of defense firms. While still very small,

it could grow as a result of the need for additional

capital.

There is also considerable public ownership in the

defense industry. Currently, about one-third of the

aircraft industry’s facilities are government-owned,

as are almost all of the fina1 assembly operations for

artillery and tank munitions.9 While DoD relies

primarily on private industry to support defense

production, it is U.S. Government policy, based on

the Defense Industrial Reserve Act (50 U.S.C. 451),

to maintain “a minimum essential nucleus (industrial reserve) of government-owned plants and

equipment to be used in an emergency.”10 This

government-owned portion of the base has shrunk in

recent years but may become relatively more important in the wake of significant reductions in defense

budgets and the resulting loss of commercial capacity.

$U.S. Congress, Office of ‘lkchnology Assessment, Am-ng Our Allies: Cooperation and Competition in Defense Technology, OTA-ISC-449

G%$h@ow DC: U.S. Government printing OffIce, May 1990), pp. 9-18.

gG~ler, op. cit., footnote 5, p. 240.

looffice of the Secretary of Defense, “GOCO Policy Statement” Aug. 22, 1989, p. 1.
Chapter 3--Structure of the Current Base ● 45

Private Sector

Before World War II, private business was not

extensively involved in defense manufacturing, with

the exception of the aviation industry. Business was

brought into defense work because of the need for

rapid expansion of weapons production and the

belief that the private sector is more innovative and

efficient than the government sector. The involvement of private enterprise moved to the forefront

issues of fairness, access, and profits. Because

defense contracting is public work for the common

national good, large profits are politically unacceptable, and business has always been justifiably

cautious about taking large risks under such conditions. During World War II, the U.S. Government

minimized business risk by building defense plants,

paying for equipment and tooling, and asking the

private sector to run them. The same was true during

the initial cold war mobilization, when the U.S.

Government paid for almost all the equipment and

facilities needed by the private sector, obviating the

need for much capital.

That situation has changed over time. Costs of

equipment and facilities were increasingly fma.need

by business, while changes in tax laws reduced

fins’ working capital. Congressional concern over

instances of fraud, waste, and abuse in contracting in

the 1980’s resulted in numerous new laws and

regulations that often reduced productivity as much

as they prevented crime. Thus, despite the rhetoric,

the private sector of the defense industry does not

conduct business in a free enterprise system. Instead,

as the Defense Science Board noted, the defense

industry

. . . is characterized at the prime contractor level by

a single buyer (the government) and relatively few

suppliers. Exercising its monopsony power, the

government has created a regulated industry, similar

to a public utility.11

The implications for the defense industry of both

private ownership and government monopsony (single-buyer) power-creating business risk while

limiting potential profits--continue to be insufficiently appreciated in policy development.

Government-Owned/Government-Operated

During and immediately after World War II, there

was a large and diverse array of government-owned/

government-operated (GOGO) defense-industrial facilities, ranging from naval shipyards to coffee

roasting plants. Beginning in the Eisenhower Administration, most of these facilities were closed or

sold off. The remaining GOGOs are oriented toward

the production of specialized military systems that

have no counterpart in the civilian sector, or the

repair and maintenance of existing systems. For

example, the Army arsenal at Watervliet, New York,

manufactures gun tubes for U.S. artillery. The Army

tank rebuild and overhaul facility in Anniston,

Alabama, serves chiefly as a repair facility, but like

.

virtually all DoD depot-level repair facilities it has

a substantial manufacturing capability that includes

unique machinery and welding facilities.

In the R&D area, the government also has some

unique government-owned/government-operated laboratories and test facilities. Some of these installations (e.g., China Lake Naval Surface Weapons

Laboratory, the Air Force’s Wright Laboratories,

and the Army’s Harry Diamond Laboratories) provide a Service capability for evaluating private R&D

development as well as conducting research of their

own; others, such as the Department of Energy’s

Nuclear Test Site and NASA’s Langley Wind

Tunnel, provide a unique national capability.

The size of the government-owned base is currently under review, including studies on the consolidation of both R&D and industrial facilities.12 The

Services argue that the government facilities are

already being reduced to a bare minimum and that

further reductions should be undertaken with great

caution. Since major cuts in defense spending are

likely to affect the various GOGOs in different ways,

it is important how the cuts are made. For example,

reduction in overall procurement and stretch-out of

programs might result in the Services’ doing more

in-house manufacturing in addition to repair. In a

ll~lce of the Under Swrew of Defense for Acquisitio~ The D@ense Industrial and Technology Base, VO1. I (Washington DC: Decmber 1988),

p. 12.

IZ~e ~y~s Vtiion 2~ R~ort addr~~ the comofi~tion of both laboratories and logistics support. ‘l’he Navy k consolidating ifi ~~mtory

system while the Air Force is consolidating its logistics and system comman ds. The Air Force and Navy appear to be ahead of the Army in many of

these efforts. A joint DoD effort is considering a consolidation of functions between Services (aircraft engines to a single Service, for example) and

changes in defense laboratories. See also Michael E. Davey, Defense Laboratories: Proposals for Closure and Consoli&tion (Washington DC:

Congressional Research Services, 1991).
46 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Photo credit: NASA

NASA Langley Wind Tunnel in Langley, VA, is a governmentowned, government-operated (GOGO) test facility that

provides a unique national capability.

period of reduced procurement, however, maintenance and repair work can help maintain the

viability of private firms that will be needed to

develop and manufacture the next generation of

weapon systems. Allocation of maintenance contracts should therefore take into account the tradeoff

between the need to preserve capabilities in the

private sector and the need for a secure and

responsive Service maintenance base. This tradeoff

is discussed in greater detail in chapter 5.

Government-Owned/Contractor-Operated

In addition to the GOGOs, there are governmentowned/contractor-operated (GOCO) facilities active

in the R&D, production, and maintenance components of the defense technology and industrial base.

While DoD has reduced the number of GOCO

facilities, three major groups remain: Army-owned

ammunition plants, Service-owned manufacturing

facilities, and the nuclear weapons R&D and production complex run by the Department of Energy

(DOE). In 1989 the Services owned 63 GOCOs with

an initial acquisition cost of more than $64 billion.

Contractors run the Army ammunition plants or

maintain them in an inactive status. Future force

reductions will result in more of these plants being

placed in reserve or closed altogether, although

demand for ammunition will be affected by policy

decisions on troop strength, readiness, and sustainability, and assumptions about the length of warning

time preceding a major conflict. Given sufficient

warning (24 to 36 months), new munitions plants

could be built from the ground up to support a

conflict against a major opponent. Thus, the ammunition production complex might be sized solely to

deal with lesser regional conflicts.

Some major weapons systems are produced by

private companies in government-owned facilities.

For example, the F-16 is produced at Air Force Plant

No. 4 in Fort Worth, Texas, while the M1A1 tank is

manufactured at the Army Tank Plant in Lima, Ohio,

and the Army Detroit Arsenal Tank Plant in Warren,

Michigan. While the Army considers many of its

facilities essential and wants to maintain ownership,

the Air Force is prepared to sell its GOCOs. Interest

among potential buyers for these government facilities has been depressed, however, by the adverse

fiscal environment for defense programs and the

liability associated with cleaning up hazardous

wastes.

The U.S. nuclear weapons complex consists of

National Laboratories (Los Alamos, Livermore, and

Sandia) operated by the University of California and

Sandia Corp. (a subsidiary of AT&T), and production facilities operated by commercial contractors,

who work under close government supervision and

control. The National Laboratories are involved not

only in the design of nuclear weapons, but also in

production and maintenance activities associated

with ensuring weapon reliability. Since technical

know-how critical to the manufacture of nuclear

weapons belongs to the government, the nuclear

weapons complex functions like an arsenal system,

and many of the critical technologies for the

production of nuclear warheads are maintained at a

single site. The current nuclear weapons complex

still includes some facilities opened during World

War II and many of 1950s vintage, and it would

make sense to consolidate the complex in response
Chapter 3--Structure of the Current Base . 47

Photo General 

Air Force Plant No. 4 in Fort Worth, TX, is a government-owned, contractor-operated (GOCO) manufacturing facility.

to both reduced East-West tensions and the need for

the modernization of facilities. Because of severe

environmental contamination,13 however, the costs

of essential site cleanup and consolidation will be

considerable, requiring large upfront expenditures

before any savings could be derived.14

Defense Industrial Sector Perspective

The DTIB can also be divided according to

industrial sectors, such as aerospace, shipbuilding,

communications, electronics, munitions, and armament. Sectoral analysis is important because the

sectors differ markedly in the way they do business

and may be affected differently by government

policies. The mass production of ammunition is

unlike the single-item production of warships, and

the problem of maintainingg adequate surge ammunition production between wars differs from the

problem of keeping a shipyard open between submarine orders. The sectors also vary greatly in the

engineering content of their work, the relative state

of U.S. and comparable foreign technology, and

integration within the broader civil industrial base.

All of these factors should be taken into account in

developing policies for the overall DTIB and for

each industrial sector in particular.

A 1987 study by the Logistics Management

Institute identified 215 industries responsible for 95

percent of defense production, including many

industries not normally considered in analyses of the

DTIB.15 According to the study, defense production

accounted for 10 percent or more of total U.S. output

in 61 industries, and 25 percent or more in 21

industries (see table 3-3). The 40 industries in which

defense production accounted for 10 to 25 percent of

total output were mainly “supplier” industries:

fasteners, ball and roller bearings, and industrial

controls. It is in these subtier-level industries that the

dependence of defense production on the larger

civilian industrial base is most evident, indicating

 of 

Cleanup: The Environmental Legacy Weapons Production, OTA-O-484 (Washington DC: U.S. Government Printing January 1991).

 Weapons Reconfiguration 

Institute, December 1987).
48 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table 3-3-Defense Share of Selected U.S. Industries

Standard

Industrial DoD DoD purchases

Category purchases

(SIC) code

as percent of

Industry name ($ millions) industry sales

3483

3731

3489

3761

3721

3728

3795

3662

3724

3339

3825

3676

3482

2892

3463

3675

3811

3677

3537

3674

3678

Ammunition, except small arms . . . . . . . . . . .

Shipbuilding & repair . . . . . . . . . . . . . . . . . . . . .

Ordnance & accessories . . . . . . . . . . . . . . . . . .

Guided missiles, space vehicles . . . . . . . . . . .

Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aircraft equipment . . . . . . . . . . . . . . . . . . . . . . . .

Tanks & tank components . . . . . . . . . . . . . . . .

Radio &TV communication equipment . . . . .

Aircraft engines & engine parts . . . . . . . . . . . .

Primary nonferrous metals . . . . . . . . . . . . . . . .

Electronic measuring instruments . . . . . . . . .

Electronic resistors . . . . . . . . . . . . . . . . . . . . . . .

Small arms ammunition . . . . . . . . . . . . . . . . . . .

Explosives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Nonferrous forgings . . . . . . . . . . . . . . . . . . . . . .

Electronic capacitors . . . . . . . . . . . . . . . . . . . . .

Engineering & scientific instruments . . . . . . .

Electronic coils & transistors . . . . . . . . . . . . . .

Industrial trucks & tractors . . . . . . . . . . . . . . . .

Semiconductors & related items . . . . . . . . . . .

Electronic connectors . . . . . . . . . . . . . . . . . . . . .

$3,733

8,111

2,298

8,678

17,104

11,542

2,445

32,610

7,174

786

6,517

605

399

416

504

480

1,618

431

1,086

4,065

901

84.5%

79.0

72.2

71.9

55.3

54.3

52.1

50.9

50.7

49.3

48.8

42.1

40.4

39.7

36.7

35.7

34.6

30.9

29.5

27.6

25.1

SOURCE: Donna J.S. Peterson, Nicholas R. Chacht, and Paul R. MeLenon, /identifying Industrial Base Derlciencies

(Bethesda, MD: Logist.ks Management Institute, 1987).

the importance to national security of a healthy,

competitive, and technologically advanced manufacturing sector.

The integration with the civil sector at these lower

subtier levels is complex. For example, there is

considerable integration in areas such as bearings

and fasteners, in which DoD accounted for 12.1 and

15.4 percent of production respectively in 1986. Yet

defense production is also specialized in ways that

make it difficult for DoD to retain selected industrial

capabilities between procurement cycles. Superprecision bearings are only 6 to 7 percent of the

domestic bearing production, but the military consumes 60 to 70 percent of that total.16

Functional Area Perspective

A final useful perspective on the DTIB is provided

by dividing it according to functional areas:

. research, development, and engineering;

● production; and

. maintenance and repair.

These functional areas generally follow the weapon

system life cycle from concept and design, through

development and deployment, into operation, and

ending with retirement. ‘

Research, Development & Engineering (RD&E)

The RD&E component of the defense technology

and industrial base is located primarily in private

industry but, as previously noted, also includes

government laboratories and test facilities run by the

Departments of Defense, Energy, Commerce, and

NASA, and university laboratories conducting research relevant to defense. DoD research and

development is composed of several budget categories in order of increasing technological maturity

(see figure 3-4): 6.1 (basic research), 6.2 (exploratory development), 6.3A (advanced technology development), 6.3B (advanced development), and 6.4

(full-scale engineering development).17 Figure 3-5

shows the funding breakdown. As a very rough rule,

universities tend to concentrate on basic research,

Service laboratories on applied research, and industry on development and engineering. For example, in

fiscal year 1990, DoD’s total obligation for basic

16Jo~t B- wO~ G~U~ of the Jofit Gmu~ on tie ~dus~ Base, Joint~gistics co~ndersBearing study, June 18, 1986, p. 5.

17u.s. cow~~,~wof ~~~1~~ ~~essmen~ The D@me Te~h~ozogy Base: ]n&odu&on und overview, OTA-lSC-374 (wfiSh@OQ ~:

U.S. Government Printing Office, March 1988), pp. 34-35.
I

Figure 3-4-Department of Defense Research and Development Process

Program

Categor y

R&D Phas e

Acquisitio n

Mileston e

6.1

Basic

Research

—

6.2

Exploratory

Development

6.3 a

Advance d

Tech no I o g y

Development t

6.3b

Ad vane e d

!

6 . 4

FuIl-scal e

Develop men t

A

1 A2 LA‘3

Exam pie: Materials, / Lab benc h Core

[

Core engine ‘

Turbin e

\

Demonstratio n

Aerodynamics , demonstratio n plu s of produc t

Engine s Chemica l of component s component s

~(~~

“prototype ”

Thermo - workin g specific to and

togethe r ap p I i cat io n; associate d

e.g. aircraft, m a n u fact u r ing

tan k p recesses

and controls

SOURCE: James Moldenhauer, Iukntifkxtion and prioritization of6.2 T=hnologies Demonstration (Pasadena, CA: Jet Propulsion Laboratory, 1986), pp. 1-2;

and Office of Technology Assessment.
50) ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Figure 3-5—Allocation of Research and

Development Funding by Function, Fiscal Year 1990

Advanced development

28%

Exploratory

Engineering development

development 7%

30% Research

2%

perational systems

development

Management and 25%

support

8%

SOURCE: U.S. Department of Defense, Office of the Comptroller, 

Programs Fiscal Yearn and 7993 (Washington, DC:

Department of Defense, Feb. 4, 1991), p. Il.

research (category 6.1) was $964 million, of which

$551 million was spent in universities, $286 million

in DoD-operated laboratories, and only $87 million

18 In contrast, of the funds in industry laboratories.

spent on advanced development (categories 6.3A

and higher), universities received only $264 million,

government laboratories $9 billion, and industry $25

billion. Figure 3-6 shows funding and work breakout.

The research phase involves investigating new

technologies that have a variety of applications;

when a specific application is in sight, much

development and engineering work is still required

to incorporate the technology into a product. The

purpose of the exploratory and advanced development stages is to obtain information about the design

and engineering of a new system so that a decision

can be made to enter production with adequate

confidence about schedule, performance, and cost.

Almost all of engineering and development is

performed by private-sector contractors, who have

the greatest experience in the practical application of

knowledge to the production of weapons and components and expect to manufacture a particular

weapon system directly related to the R&D. While

this private component of the base is critical to the

U.S. Government’s defense responsibilities, it is

Photo credit: U.S. of Defense

Prototype of an electromagnetic cannon undergoes testing

at the Picatinny Arsenal in New Jersey, an R&D facility

run by the U.S. Army.

also the most difficult to maintain during a period of

declining defense spending.

Corporate research and development is funded

either from direct DoD contracts or from company

profits generated through sales of goods and services. Many R&D efforts are supported from both

sources of funds. For example, while the government may provide a company a contract for the

development of a system, the company may also

contribute substantial amounts of its own money,

which can be justified if the development leads to a

profitable production contract.

Defense contractors currently defray some negotiated fraction of R&D expenses through “independent research and development’ (IR&D) charges

against ongoing contracts; that is, companies can

charge some of their R&D as an allowable expense,

similar to overhead. In fiscal year 1989, governmentallowed IR&D charges totaled $2.2 billion. IR&D is

conducted under the supervision of DoD, which

must approve the general research areas and amounts

but exerts little detailed control beyond review and

audit once approval has been given. The companies

 Science Fiscal Years 1988,1989, 

DC: National Science Foundation 1990), p. 35 and 57. Breakouts do not add up to the total because some categories, e.g., nonprofit institutions, are

not listed.
Chapter 3-Structure of the Current Base ● 51

Figure 3-6-Allocation of Research and Development Funding by Performer, Fiscal Year 1990

Research funding

Industry

9%

57%

Industr

68%

Development funding

Applied research and

exploratory development

Industry

43%

 In-house

, 25%

 Foreign

/ 1%

 In-house

%

Foreign 1%

Federally funded

Y R&D centers and

I> Universities

non-profits

Universities

39%

1%

Federally funded

R&D centers and

non-profits

5%

SOURCE: National Science Foundation, Federal Funds for Research Years 1988, 7989. and 7990, vol. 38, NSF 90-308. Detailed

Statistical Tables (Washington, DC, 1990), tables 14, 21, and 28. 

propose the areas in which to work and keep the

commercial rights to developments. Significant

design work associated with a specific request for

proposal can also be included in a company’s bid

and proposal (B&P) efforts for future contracts and

also recovered as an overhead expense. In 1989,

industry recovered $1.3 billion in B&P overhead

charges. 19

There has been some controversy about the IR&D

program over the years. Critics argue that IR&D

funds are used for research that the companies would

probably undertake in any case, and that IR&D

creates an added hurdle to market entry for firms that

do not have DoD production contracts and hence are

not eligible for the funds. Proponents of IR&D

counter that since government procurement procedures limit profit, companies need a mechanism to

fired R&D. The proponents also contend that the

current IR&D approach benefits DoD by allowing

companies to stay current in critical areas of defense

technology, encouraging technical innovations, and

giving government scientists and engineers valuable

insights into ongoing industrial research. Other

programs, such as the Small Business Innovative

Research Grants, are meant to compensate for initial

lack of access to IR&D funds by firms entering the

defense market.

Of course, if research and development costs are

not recoverable as IR&D, nothing prevents companies from paying for some R&D out of their gross

profits. Indeed, under freed-price contracts, the

actual accounting category does not affect a com-

 office of the of Defense (Research 
52 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

pany’s profit because the charges either come out of

profit or go into overhead, reducing profit by the

same amount. Some firms, especially specialized

subtier companies that depend for their livelihood on

one technology, are wary of government-sponsored

R&D because of potential conflicts over government

rights to technical data. These firms prefer, therefore, to support their own R&D out of profits.

Private industry’s decisions about research investment are strongly influenced by financial considerations. Since profits come largely from produced weapons, there is a general preference for

R&D with a fairly predictable near-term return on

investment and hence for product development

rather than more basic research. Most firms concentrate on improving existing products and components, or developing new products most certain of

gaining acceptance.

In addition to DoD-funded R&D contracted out to

the private sector, in fiscal year 1990 over $11

billion was spent in-house by the research, development, and test facilities operated by the individual

military Services. The size and missions of Service

laboratories vary greatly. Some Service laboratories

do basic research, but most focus on applicationspecific work and may also carry out prototype

development. Each Service has a different style and

emphasis: Navy laboratories do considerable inhouse R&D, including basic research at the 6.1

level; Army laboratories generally focus on research

at the 6.2 and 6.3 levels; and Air Force laboratories

are organized by technology and emphasize the

development of expertise to contract effectively

with industry rather than performing extensive

in-house research. The Services are currently responding to cutbacks by consolidating their laboratories to preserve in the surviving facilities the

minimum number of personnel needed for good

research. Test facilities such as those at China Lake

and Nellis Air Force Base are particularly crucial

because they involve a large capital investment and

hence are unlikely to be replicated by the private

sector.

The Office of the Secretary of Defense (OSD)

does not operate any research laboratories, but it

does have the Defense Advanced Research Projects

Agency (DARPA), whose mission is to support

“high-risk, high-payoff’ research. DARPA establishes priorities and funds research carried out either

in government or industry laboratories and managed

Figure 3-7-Funding of Manufacturing Technology

(MANTECH) Program, 1980-91

Millions of dollars

2 8 0

2 4 0

200

160

120

80

40

0

80 81 82 83 84 85 86 87 88 89 90 91

Fiscal year (actual)

= Arm y ~ Nav y

= Air Force = Defense Logistics

SOURCE: Office of Technology Assessment, 1991, based on information

supplied by the U.S. Department of Defense.

in collaboration with the Services. Although DARPA’s

charter has caused it to concentrate on the early

stages of research, it has also begun to support

selected projects to more advanced stages of development to demonstrate proof-of-concept. Such demonstrations are intended to make the Services more

likely to apply the results of DARPA-funded research. While DARPA projects cut across Service

boundaries, the agency does not have the resources

to support a comprehensive technology program

alone, nor does it have the explicit role of filling the

gaps between Service research programs.

DoD also has access to 10 Federally Funded

Research and Development Centers (FFRDCs).

These nonprofit institutions include: the Institute for

Defense Analyses, the Rand Defense Research

Institute, the Logistics Management Institute, the

Massachusetts Institute of Technology’s Lincoln

Laboratory, Mitre Corp., and Aerospace Corp. They

provide research and analytical support to OSD and

the Services and in fiscal year 1990 had finding in

excess of $1.5 billion.

Most military R&D is product rather than process

related. Nevertheless, a considerable amount of

manufacturing process R&D occurs as firms learn

how to manufacture a system. Since this cost is part

of overall procurement, however, it is not funded as

R&D. This loophole may be particularly important

for subtier producers of critical subsystems, who

may receive a fixed-price contract from a prime to

deliver a particular product.
Chapter 3-Structure of the Current Base ● 53

Box 3-B—Department of Defense Manufacturing Technology Program

U.S. military support for improvements in manufacturing technology can be traced back at least as far as the

19th century, when the Army supported manufacture of interchangeable parts for muskets. Since the Second World

War, the military has become increasingly active in manufacturing technology, a prominent example being the Air

Force’s support of numerically controlled machining. Manufacturing Technology, or MANTECH, has been a

formal DoD program to advance defense manufacturing since 1977.

The purpose of MANTECH programs is to improve productivity and responsiveness, with the expectation that

these efforts will ultimately reduce defense procurement costs. MANTECH programs support a broad range of

manufacturing technologies. For example, the Defense Logistics Agency funds programs to automate the

manufacture of uniforms, the Navy to improve shipbuilding technology, the Air Force to lower costs of engine

repair, and the Army to speed the inspection of ammunition.

MANTECH and similar programs are needed because defense manufacturers have few incentives to improve

productivity under cost-based procurement. In normal commercial manufacturing a company has incentives to

improve productivity because profits can be increased by reducing manufacturing costs. In contrast, the price of

government contracts are typically based on cost, so that any reduction in cost results in a lower price for the

government. Companies benefit indirectly from lower costs by improving their chances of getting the next contract,

but not directly by obtaining higher profits. Since the government is the main beneficiary of productivity

improvements, it ends up having to pay explicitly for at least some of them.

In general, support for the MANTECH program is stronger from Congress than it is from the Department of

Defense (DoD). For example, for the 1991 budget, Congress added $150 million to DoD’s $265 million request.

Nor has Congress been completely satisfied with DoD’s management of the MANTECH program. One result has

been Congress’ mandate in the 1991 defense appropriation act for a DoD Manufacturing Technology Plan, which

is still being developed.

MANTECH is tiny compared to defense procurement programs and is only apart of DoD’s efforts to improve

manufacturing technology. Much learning is involved whenever a new item is manufactured; for example, a great

deal of the technology involved in using composite materials is associated with manufacturing them and

incorporating them into products. DoD also supports other manufacturing technology programs. The Defense

Advanced Research Projects Agency’s SEMATECH program, designed to improve micro-chip manufacturing, is

probably the best known. The Strategic Defense Initiative Office also funds research efforts such as improved

manufacturing of precision optics. Other sources of funds, such as Independent Research and Development (IR&D),

are not earmarked specifically for manufacturing technology but may be used for this purpose.

Measuring the results and effectiveness of MANTECH is difficult because of the program’s broad goals.

Return on investment can be calculated for a particular project, but MANTECH projects are supposed to have wide

applicability. Despite DoD newsletters, technical publications, conferences, and databases, however, there are

frequent complaints that the benefits of MANTECH are not adequately diffused throughout industry.

The Services and OSD explicitly fund research on and directed OSD to develop a more coordinated

manufacturing process technologies through the program.

Manufacturing Technology (MANTECH) program

(see figure 3-7 and box 3-B). Since 1986, the Air

Force has most heavily funded MANTECH and the

Navy somewhat less so. Prior to that year the Army

placed heavy emphasis on MANTECH, but it moved

to terminate the program on the grounds that it was

too small to accomplish its stated objectives. Although the Army subsequently reinstated its MANTECH program, Army officials favor devoting more

resources to manufacturing technology development

by providing funds for this purpose in weaponsystem production contracts. The 1991 Defense

Authorization Act increased MANTECH funding

DARPA has also supported manufacturing process R&D through its former Defense Manufacturing

Office (DMO), which was established to improve

manufacturing know-how, reduce the cost of enditems, and create a production capacity for critical

items where one did not exist. Like all DANA

programs, DMO-funded R&D was contracted out to

industry, government, and university laboratories,

and collaboration was encouraged. The office was

eliminated in April 1991 and some of its functions

transferred to other offices. DMO’s best known

effort, SEMATECH, a consortium of U.S. electron-
54 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

ics firms with the goal of improving semiconductor

manufacturing technologies, is now managed by

DARPA’s Electronic Systems Technology Office.

Defense contractors have few financial incentives

to improve manufacturing efficiency. Since the

Federal Government is the sole buyer and limits a

fro’s profits, a defense firm (unlike its commercial

counterpart) cannot easily increase its profit margin

by reducing manufacturing costs and selling at the

old market price. Using its audit authority, the

government has available actual costs as the basis

for next year’s contract negotiations. Because profit

is calculated as a percentage of cost, the more

efficient the contractor becomes, the less profit it

makes.

Congress may want to investigate in more detail

how to encourage the manufacturing R&D that is

naturally embedded in weapon system production,

as well as corporate investments in improved

productivity. There are indications that perverse

incentives created by the current acquisition process

impose more important constraints on manufacturing productivity than any lack of know-how. These

constraints are examined in greater detail in the

discussion of trends in the base in chapter 4 and in

the discussion of policy options in chapter 5.

Other government agencies play important roles

in defense R&D. Three DOE laboratories, Lawrence

Livermore, Los Alamos, and Sandia, conduct both

defense and non-defense research and have primary

responsibility for the scientific understanding, design, development, testing, and “surveillance” of

nuclear warheads. (The latter term refers to continued testing and quality assurance, which are necessary because of the unstable nature of nuclear

materials.) Currently, nuclear weapons responsibilities account for about 40 percent of the work of the

three laboratories.

DOE Laboratories also have a secondary but

important role in research on advanced conventional

weapons and military support tasks, such as communications, intelligence, and arms control verification. These missions accounted for 16 percent of

total weapons laboratory funding in 1990, and

represented the lion’s share of DOE’s “work-forothers.

Some of the DOE laboratories are currently

involved in consortia seeking to develop innovative

manufacturing capabilities for the Strategic Defense

Photo General Dynamics

Robot assembles electronic circuit boards for the Army’s

SINCGARS radio system at the automated General

Dynamics plant in Tallahassee, FL.

Initiative. A Manufacturing Operations Development and Integration Laboratory (MODIL) specializing in survivable optics is located at Oak Ridge

National Laboratory, while a second MODIL at

Sandia National Laboratory is devoted to advanced

infrared sensors and signal processing. These

MODILs draw together government, industry, and

university participants to develop and demonstrate

new production and automation processes for specific technologies.

Other research by the national laboratories in

non-defense fields (energy, environment, etc.) helps

to maintain a pool of scientific and engineering

talent and knowledge that could be helpful for

meeting future military needs. Indeed, one expected

benefit of mixing defense and nondefense work at

the same laboratories is that mutually beneficial

cross-fertilization will occur.

The Department of Commerce’s National Institute of Standards and Technology (NIST) specializes in measurement technology (metrology) and

performs some research and testing for DoD, including long-ten-n basic research. In fiscal year 1991,

DoD-funded work performed by NIST amounted to

just under $60 million. Of particular importance to

industrial base issues is that NIST sets standards for
Chapter 3--Structure of the Current Base ● 55

Table 3-4-Defense Procurement Funding (Budgetary Authority) for

Fiscal Years 1990-93

Procurement funding ($ millions)

Army

Aircraft . . . . . . . . . . . . . . . . . . . . . .

Missiles . . . . . . . . . . . . . . . . . . . . . .

Weapons/tracked vehicles . . . .

Ammunition . . . . . . . . . . . . . . . . . .

Other procurement . . . . . . . . . . .

Navy

Aircraft . . . . . . . . . . . . . . . . . . . . . .

Weapons . . . . . . . . . . . . . . . . . . . .

Shipbuilding and conversion . .

Other procurement . . . . . . . . . . .

Marines

Total procurement . . . . . . . . . . . .

Air Force

Aircraft . . . . . . . . . . . . . . . . . . . . . .

Missile . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . .

FY1990

(actual)

3,703

2,463

2,495

1,861

3,532

9,158

5,278

11,210

7,599

1,162

15,414

6,371

8,491

FY1991 FY1992 FY1993

(estimate) (estimate) (estimate)

1,080 1,667 1,247

2,044 1,106 1,342

1,903 839 574

1,248 1,250 1,195

2,457 3,164 3,254

6,150 7,217 6,953

5,623 4,531 4,755

9,789 8,759 8,298

5,520 6,459 6,521

650 1,010 651

9,322 10,916 13,457

5,498 5,842 6,777

7,582 8,058 8,869

Total percent

change

1990-93

-46

–77

-36

- 8

–24

–lo

–26

–14

–44

-13

+6

+4

Defense agencies

Total procurement . . . . . . . . . . . . 1,351 2,433 2,112 2,201 +63

National Guard & Reserves . . . . . 988 2,464 NA NA NA

Defense Production Act. . . . . . . . . 50 50 NA NA NA

Chemical agents and munitions.. 88 101 — — —

81,214 63,914 60,818 66,094 -19

NA-Not available.

SOURCE: U.S. Budgetforfiseal year 1992.

both civil and military producers, for example in

automated manufacturing.20

Production

The production component of the DTIB,1ike the

R&D component, is made up primarily of private

firms but also includes both government-owned/government-operated and government-owned/contractoroperated facilities. Defense procurement funds authorized for fiscal year 1990 were $81.2 billion21

directed toward a wide range of production programs (see table 3-4), and roughly another $23

billion in procurement through the central supply

and maintenance spending in the operations and

maintenance accounts. Procurement budget authority has been falling in constant dollars since fiscal

year 1986. Despite several years of continued high

outlays of funds as previously ordered systems are

built, defense firms and the financial markets have

already begun adjusting to planned reductions in

defense spending in the 1990s.

The production component of the DTIB has been

important during the cold war not only for the

weapon systems it has produced, but because it has

been key to maintaining the overall health of the

base. The expectation of profitable production runs

has kept companies in the defense business, and

production has helped pay for corporate R&D. As

noted earlier, IR&D funding is tied directly to

procurement. Further, contractors may spend their

own money on research for decades in anticipation

of a future production run that will result in

improved profits for the firm. Production, then, has

long been the “engine” of the DTIB. For this

reason, the expected reduction in production contracts is viewed with much concern.

The actual number of firms in the defense

production base is difficult to determine precisely. In

March 1989, the Pentagon reported that somewhat

over 9,000 production facilities had been identified

as planned emergency producers for surge or mobili-
56 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

zation. 22 Yet such “planned producers” represent

only a small fraction of the overall defense production base. Much of this base is, as noted earlier,

composed of manufacturing firms that supply components and parts to firms having direct contracts

with the Department of Defense. These subcontractors in turn purchase parts from lower tier suppliers.

Production planning requires a tradeoff between

efficient peacetime production of weapons and

wartime responsiveness. The production component

has also been most heavily affected by many of the

defense acquisition rules. Critics contend that these

rules, mandating methods of manufacturing, auditing, special testing, and so forth, have increasingly

isolated producers of defense goods from the broader

industrial base.

The procurement reductions since 1986 have had

a negative effect on almost all programs (see figure

3-8). Aviation has been particularly hard hit and a

number of other programs are scheduled to be

terminated or greatly reduced. As a result, production rates will continue to show a strong downward

trend. Few new major programs are expected over

the next 5 years other than the Army’s Light

Helicopter and the Air Force’s Advanced Tactical

Fighter. The effects on firms will be significant,

since the defense industry currently possesses enormous

overcapacity at the prime contractor level.

Studies over the last decade have also indicated a

decline in the number of subtier defense suppliers.

These findings have given rise to two sets of

concerns:

●

●

The

that the remaining defense suppliers will have

inadequate capacity to respond to a surge or

mobilization requirement; and

that the declining number of suppliers will

result ultimately in a total loss of domestic

capacity and critical skills in key sectors.

degree to which either of these concerns is valid

in the c-merit situation is a matter of debate. A major

unknown is the Nation’s future requirement for

surge or mobilization. Another unknown is the

number of firms that are capable of supporting U.S.

defense needs but choose not to do business with the

government.

Figure 3-8--Procurement of Major Weapon Systems,

Fiscal Years 1974-93 (currant $)

25 I

m I /1 \ /\ \ / l

g 10

.-

=

z

5

0

L

1975 8 0 8 5 90

Year

‘“– Ships + Missiles

‘~– Aircraft —u– Tanks and combat

vehicles

SOURCE: Raymond J. Hall, ‘Total Quantities and Costs of Major Weapon

Systems Procured, FY 1974-93” (Washington, DC: Congressional Budget Off”me, 1991), pp. 1-2.

Maintenance and Repair

The maintenance and repair component of the

DTIB consists of government facilities such as

Naval Shipyards, Naval Aviation Depots, Air Logistics Centers, and Army Arsenals and Depots (see

table 3-5), as well as private firms that maintain and

repair equipment either at their own facilities or in

the field. Maintenance and repair, always a critical

factor in supporting military forces, will be increasingly important in a period in which equipment is

retained for extended periods.23

DoD’s in-house maintenance and repair facilities

contain unique rebuild, overhaul, and manufacturing

capabilities. While organic maintenance capabilities

attached to operating forces can be expected to

decline in rough proportion to reductions in force

levels, the potential effect on depot-level facilities is

less predictable. Over the short term (5 to 10 years),

retirement of older systems associated with force

reductions may greatly diminish maintenance requirements. After that point, however, equipment

will probably be retained longer and upgraded rather

than replaced. Thus, in the long run (10 years or

ZTJ.S. Department of Defense, O&Ice of Industrial Base Assessment, A Guidefor Indusm”al Mobilization, March 1989, PP. 1-2.

ms~dies indicate that 5c)percentof theto~ cost of a weapon system are attributed to the operations and maintenance costs over tie life of tie deploy~

systems. Not only does this make maintenance and repair capabilities important, but it should also increase the importance of maintainability and

reliability as design factors in weapons systems.
Chapter 3-Structure of the Current Base . 57

Table 3-5-Principal Maintenance and Repair Facilities

Army

Anniston Army Depot

Corpus Christi Army Depot

Letterkenny Army Depot

Lexington Bluegrass Army Depot

Red River Army Depot

Sacramento Army Depot

Tobyhanna Army Depot

Tooele Army Depot

Air Force

Oklahoma City Air Logistics Center, Tinker AFB

Ogden Air Logistics Center, Hill AFB

San Antonio Air Logistics Center, Kelly AFB

Sacramento Air Logistics Center, McClellan AFB

Warner-Robins Air Logistics Center, Robins AFB

Aerospace Guidance and Metrology Center, Newark AFB

Wright-Patterson AFB

Navy

Norfolk Naval Aviation Depot

Cherry Point Naval Aviation Depot

Jacksonville Naval Aviation Depot

Pensacola Naval Aviation Depot

North Island Naval Aviation Depot

Alameda Naval Aviation Depot

Navy Ordnance Station, Indianhead

Norfolk Naval Shipyard

Philadelphia Naval Shipyard

Portsmouth Naval Shipyard

Charleston Naval Shipyard

Long Beach Naval Shipyard

Puget Sound Naval Shipyard

Mare Island Naval Shipyard

Pearl Harbor Naval Shipyard

SOURCE: Office of Technology Assessment, 1991.

more) DoD maintenance facilities may receive more

work despite lower force levels. The ongoing

consolidation and streamlining of government facilities must therefore maintain critical skills for the

future even while reducing the current workforce.

In addition to GOGO maintenance facilities,

private contractors do substantial repair and overhaul work for all of the military services. Private

fins, facing the downturn in new procurement, see

repair, overhaul, and upgrades as a means to

maintain their manufacturing capabilities and stay in

business. Although the Services reserve a critical

minimum amount of work for in-house facilities to

ensure that core capabilities are retained and can be

made available in a responsive manner, DoD plans

to contract work above this minimum on a competitive basis between Service facilities and private

fins .

MANAGEMENT OF THE BASE

After World War II, several key pieces of

legislation were passed to retain an armaments

production and mobilization base for future crises.

The Strategic and Critical Stockpiling Act of 1946

established the national strategic stockpile of raw

materials. The National Security Act of 1947 contained provisions for the creation of a National

Security Resources Board to advise the President on

military, industrial, and civilian mobilization and on

programs for the effective wartime use of U.S.

natural and industrial resources,24 and the retention

of the Munitions Board to coordinate industrial base

activities within DoD.25 The Armed Forces Procurement Act of 1947 provided a means for the Defense

Department to build an industrial mobilization base

by taking national security interests into account

when awarding defense contracts. The Industrial

Mobilization Plan of 1947 formed the basis for

industrial preparedness planning and created the

physical plant program for the DTIB.26 This plan

envisioned the mobilization of the Nation’s resources as a fundamental aspect of national security

and considered peacetime investment in mobilization capacity. Finally, the National Industrial Reserve Act of 1948 enabled the Secretary of Defense

to husband certain industrial capabilities for emergency defense uses.27

Responsiveness

The flurry of legislation enacted at the close of the

1940s under the rubric of mobilization planning

established the legal basis for the DTIB that exists

today. In response to the outbreak of war in Korea

and concern over the possibility of escalation,

~The Natio~l fhnuityAct of ]947, Title I, $ec. 103.

‘Ibid., sec. 213.

~~id.,pp. 9- I 1. Armex47 of the 1947 plan detailed the objectives of the plant survey andallocationprogmnx 1) to determm“ ewhere essential military

items caubeobtain~ 2) to el iminatecompetition among procurement agencies for output of a single plan~ 3) to acquaint industry with its taskinwartime

aud to encourage industrial planning for rapid expansion; 4) to promote orderly distribution of the initial production load of war requirements; 5) to

maintain a current record of competent producers and their capacities; 6) to determine what required items cannot be provided by conversion of private

industry in order to establish requirements for construction of new facilities; and 7) to mhhnize requirements for new construction by proper utilization

of existing facilities.

%oderick L. Vwvter, Industrial Mobilization: The Relevant History (Industrial College of the Armed Forces Study in Mobilization and Defense

Management Washingto% DC: National Defense University Press, 1983), pp. 8-9.
58 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

President Truman declared a national emergency

and ordered a mobilization effort far in excess of the

immediate requirements of the Korean conflict. The

Defense Production Act of 1950 provided the

authority to expand overall national industrial production capacity and to manage the base during the

conflict. Various portions of the Act remained in

effect until its expiration in October 1990; a

reauthorization of the Act is currently being debated.

Emergency preparedness functions are controlled

by Title 50 of the U.S. Code, Presidential directives,

and Executive orders. Under Title 10, U.S. Code,

Chapter 148, “Defense Industrial Base,” the major

responsibility for defense-industrial responsiveness

planning belongs to the Department of Defense.

DoD manages the industrial base program through a

series of production base analyses (PBAs), which

support industrial preparedness planning for force

regeneration over a wide range of crises and

emergency situations. This process complements the

strategic planning system employed by the U.S.

Joint Chiefs of Staff, who develop mobilization

requirements on the basis of critical items lists

prepared by U.S. military commanders throughout

the world.

A key to meeting the Nation’s potential wartime

requirements in the 1990s and beyond will be to

determine the role of the DTIB in deterrence and

response to warning. The national security community has sought a range of options to deal with

crisis-options that could signal determination,

provide flexibility, and, ultimately, deter conflict.28

Starting in the mid- 1980s, defense analysts proposed

the notion of incremental response to crisis or war

based on the formal military Defense Alert Condition (DEFCON) scheme. This approach later evolved

into the concept of Graduated Mobilization Response (GMR), which “provides a system for

developing and implementing mobilization actions

. . . responsive to a wide range of national security

threats and ambiguous and specific warning indicators. ’29 GMR actions are designed to enhance

deterrence, mitigate the risk of a crisis, and reduce

significantly the lead time associated with mobilization should the crisis intensity.

Within the Department of Defense, GMR is

viewed as both a near-term mobilization planning

tool and as a hedge against the long-term reconstitution of Soviet military power. Testifying before the

Senate Committee on Foreign Relations, Under

Secretary of Defense for Policy Paul Wolfowitz

commented: 30

We must also be prepared to respond over a much

longer period of warning to any future Soviet attempt

to reconstitute its strategic theater capability. With

this in view, crisis management capabilities and

graduated mobilization responses to assure continuing deterrence will become relatively more important than in the past.

Peacetime Acquisition

General government procurement policy is contained in Titles 40 and 41 of the U.S. Code, while

defense procurement policy is contained in Title 10

(Armed Forces). These statues have been translated

into regulations known as the Federal Acquisition

Regulations (FAR), which govern contracting procedures, and supporting DoD and Service directives.

As a result of the Military Reform Act of 1986 (the

Goldwater-Nichols Act), the Department of Defense

established the position of Under Secretary of

Defense for Acquisition (USD(A)), responsible for

all DoD industrial and technology base programs

except the Strategic Defense Initiative Organization.

The Defense Management Review conducted by

Secretary of Defense Cheney noted that the USD(A)’S

authority on acquisition extends to “directing the

Secretaries of the Military Departments on the

manner in which acquisition responsibilities are

executed by their Departments. ’ ’31

The Goldwater-Nichols Act further required the

individual Armed Services to appoint Service Acquisition Executives, who manage the weapon

procurement activities of subordinate Program Executive Officers (PEOs). The PEOs, in turn, oversee

Program Managers for each major system. The

Service Acquisition Executives also participate in

the Defense Acquisition Board, which reviews

procurement milestones for major weapon system

programs and makes recommendations to the Secretary of Defense regarding continuation and required

2SFr~ &lucci, Natio~ Security Council Memo 1063/1, “National Security Emergency Preparedness priorities, ” Sept. 15, 1987.

WI.4 CFR pm 334, 6‘&adwted Mobilization Response, ” Jan. 19, 1990.

‘Paul Wolfowitz, “Statement Before the Semte Committee on Foreign Relations,” April 1990.

31s=e~ of Defense ~~h~d Cheney, Def~~e Ma~ge~nt Repofl to the President, JuIy 1989, p. 3.
Chapter 3--Structure of the Current Base . 59

Figure 3-9-Management Structure of a Typical Weapon Acquisition Program

Service Acquisitio n

Exe c u t ive

1

)

L

Undersecretar y

of Defens e

F-–------- l

for Acquisition

Assistant Secretar y

‘

Production an f Defense d

A

I

Defense Logistic s

Program Executiv e Agenc y

Office r Defense Contrac t

I I

~ M a n age men t Center

Sub-C o n tractors

Supplier s

I

SOURCE: U.S. Department of Defense briefing, April 1991,

levels of funding. The management structure of a

typical weapon acquisition program is illustrated in

figure 3-9. This structure is said to allow oversight

over program cost and progress by both the Services

and OSD.

At present, management of defense R&D is

dominated by the individual Services. Each Service

not only runs its own laboratories but sets its own

research priorities and goals, on the grounds that it

is best placed to determine its technology strategy

and funding levels.32 The drawback of this approach

is that the Services’ technology base strategies are

geared to maximize their respective military missions, with little coordination among them in the

interest of overall national security needs. As the

defense laboratory system shrinks, coordination at a

high level may be required to avoid both redundancy

and gaps in coverage.

In particular, some critics contend that the Nation’s overall security interests would be better

served by stronger guidance and control of technology programs from a central OSD source.33 While

OSD’s Defense Guidance document does provide

some technology planning guidance, it has been

criticized as superficial and has had little impact on

the direction of Service technology efforts. Furthermore, the Services, DARPA, and the Strategic

Defense Initiative Organization (SDIO) report to

different levels of the OSD bureaucracy, making an

overall R&D strategy virtually impossible to develop or implement (see figure 3-10). Although the

Service Chiefs of Research have recently begun to

coordinate their basic research programs, a reorganiza32c&e, fOr ~xwple, ~~ w F~r&*~ ~ l$lg(j T~~h~Ology Ar~a plans, tie &y’s Technology Base Master plan, and the Navy’s Exploratory

Development (6.2) Investment Strategy.

sqFr~~ck ~dde.l et ~. (~s.), Repo~ of the Task Force for Improved coordi~tion of the DoD science and Technology program (MeXiUMh’@ VA:

Institute for Defense halyses, Report R-345, August 1988), p. 3.
60 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Figure 3-10-Department of Defense Management Structure for Research and Development

Of f Ice of Tech no I o g y

t he Bas e

Secretary of Defens e

Pro g r ams

Secret a r y St r ate g I c

o f 4 Defens e

D efens e I n I t I ative

1

Organizatio n

Under Secretary

of De fens e for

AC q u is i t i o n

w

9

Director ,

Defens e

Defense Researc h

Advanced Researc h

T 1

end Engineerin g

Projects Agenc y

Deputy Director, I

Defense Researc h

B 9 1

and Engineerin g

Arm y Nav y Air Forc e

f o r

Research an d

Advance d Tech n o I og y

SOURCE: U.S. Congress, Office of Technology Assessment, Hotiing the Edge: Maintaining tie Defense TAno/ogy Base, OTA-ISC-420 (Washington, DC:

U.S. Government Printing Offioe, April 1989), p. 21.

tion of DoD’s research management structure may

be necessary to achieve greater efficiency.

Logistics, maintenance, and repair are essentially

handled as Service functions. As previously noted,

however, the consolidation of some of these functions across Services is being undertaken as a

cost-saving measure.

In recent years, the legislative branch has exerted

influence over the management of the DTIB, both

directly (e.g., the Goldwater-Nichols Act) and indirectly through appropriations and hearings. The

massive increase in defense spending in the 1980s,

and the perception of pervasive “fraud, waste, and

abuse” that accompanied some spending scandals,

caused Congress to increase its oversight.34 As a

result, DoD is currently monitored by 30 committees, 77 subcommittees, and 4 panels in the process

of budgeting, authorizing, appropriating, overseeing, and investing defense resources each year.35

Critics contend that the redundancy and complexity

of the congressional oversight process, and the

extensive reporting requirements, impose a burden

on DoD that constrains its ability to manage. They

further argue that the yearly budget cycle that

dominates procurement makes it extremely difficult

to conduct longer range planning and inhibits

industry investment in improved manufacturing

productivity.

SUMMARY

A comprehensive view of the DTIB is possible

only by combining several different perspectives,

the major ones having been outlined in this chapter.

Although one can talk of the DTIB as a coherent

~J. Ro@dFox~~J~es L. Fiel~ The DefeNe Manage~nt Challenge: WeaponsAcquisition (’BOstom h’ffi: *mdBustiess Schwl *ss, 1988),

pp. 72-84. Fox believes that this resulted in micromana gement as evident in the numbers of hearings held, committees and staffs involv~ details of

legislation writte~ and the number of reports required. ‘‘The 1985 budget request contained 1,890 separate line entries forpmcureme nt and 897 program

requests for R&D. A joint Senate-House conference committee eventually authorized 92.5 percent and 94.4 percent of the Budget Aufhority requested

by the Administration for procurement and R&D, respectively. Nevertheless, the HASC and SASC together changed. ..23.3 percent of theproeurement

line entries, and. . . 35.3 percent of all R&D programs.” He also noted that “in 1985, the Pentagon was able to iden@ 458 congressional reporting

requirements stemrning from prior years’ defense authorization and appropriation bills and their accompanying qorts.”

jsDejeme Managemnt Report to the President, footnote 31, p. 24.
Chapter 3--Structure of the Current Base ● 61

entity, it is clearly a complex mixture of government

and private ownership, large and small fins,

R&D- and production-oriented organizations, and

domestic and foreign sources. Moreover, the structure of the base is in constant flux. The private/public

ownership mix is changing, and the importance of

particular industrial sectors will shift as new types of

weapons are developed. As a result, no single

perspective can describe more than one or two

aspects of the base. Distinctions based on one

perspective, such as between public and private

ownership, may be outweighed by other factors such

as the size of the firm.

While the complexity of the DTIB makes it

difficult to formulate universal policies, good management practice argues against trying to develop

individualized measures for each defense-industrial

sector and firm. The challenge that the complex

structure of the base poses for Congress is to develop

policies broad enough to be manageable, yet sufficiently tailored to be effective.
Chapter 4

Trends and Problems in the Base
Contents

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

GENERAL TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

SPECIFIC ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Disincentives for Manufacturing Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Inappropriate Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

Increasing Globalization of the Defense Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Changing R&D Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

. . . Diminishing Industrial Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Management Inertia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

CURRENT GOVERNMENT AND INDUSTRY STRATEGIES . . . . . . . . . . . . . . . . . . . . ..73

Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Concentration on Defense Work . . . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . * +, * * * * . * .*.**+.*. 75

Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Arms Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Boxes

Box Page

4-A. How Government Auditing Requirements Isolate the Defense Industry . . . . . . . . . . . 66

4-B. Problems With the Competition in Contracting Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

4-C. Industry Views on Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

4-D. Export Control Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

Figure

Figure Page 

4-1. Five-Year Stock Price Performance of Major Defense Firms Relative to S&P 500,

Dec. 31, 1984-Dec. 31, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Tables

Table Page

4-L Trends in the Current Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

4-2. Comparison of National Critical Technologies With Department of Commerce

Emerging Technologies and Department of Defense Critical Technologies ........74
Chapter 4

Trends and Problems in the Base

INTRODUCTION

The defense technology and industrial base (DTIB)

has expanded and contracted three times since the

end of World War II: the initial cold war mobilization in the early 1950s, the Vietnam War, and the

peacetime defense build-up of the early 1980’s,

which began to contract in 1987.

Some trends in the current DTIB are listed in table

4-1. The R&D element of the base has been

criticized as losing its overall competitive edge.

Although U.S. weapons performed well in Operation Desert Storm, critics argue that these weapons

were the products of earlier research (some in the

1950’s and 1960’s) and question whether the United

States will continue to enjoy a weapons performance

edge in the future. Nevertheless, it is important to

consider future defense R&D requirements in the

context of realistic threats, which, in the next decade,

are likely to be relatively less demanding than in the

recent past.

Current production capacity at the prime-contractor

level exceeds both peacetime production requirements and most expected surge requirements. There

are, however, long lead times at the subtier producer

levels, and the production element has been criticized for its isolation from the broader civilian base

and the resulting increased costs of weapons. Finally, all elements of the DTIB are becoming more

international, raising concerns over potential vulnerabilities arising from excessive dependence on

foreign sources.

GENERAL TRENDS

The DTIB shares many of the problems of the

civilian technology and industrial base, including

the high cost of capital, which reduces the ability to

make needed investments, and low rates of increase

in productivity. Defense contractors argue that they

face a host of additional problems specific to the

defense industry. In the 1980’s these problems

included fixed-price contracts on risky development

projects, overly demanding military specifications,

government demands for rights to proprietary data,

instability in program finding, government-imposed

limits on profits, and burdensome auditing requirements (see box 4-A). All these factors have tended

to isolate the defense base from the broader civilian

base. Further, changes in U.S. Government procurement rules during this period reduced recovery rates

of independent research and development (IR&D)

and bid and proposal (B&P) expenses, delayed

progress payments, and increased company responsibility for purchasing new tools and test equipment.

These changes required firms to have increasing

amounts of capital on hand simply to stay in the

defense business. Government pressures for business to help finance costly (and risky) development

projects such as the Air Force’s Advanced Tactical

Fighter and the Navy’s A-12 attack aircraft also

contributed to the need for capital.

Beginning in 1986, cuts in defense spending

depressed defense fins’ stock prices and made

equity financing increasingly unattractive or impossible, forcing companies to borrow to finance capital

investment and production. Major defense firms also

took on future debt as a result of aggressive bidding

for fixed-price development contracts.1 By the end

of the 1980’s, nearly all of the major defense

contractors were considered poor business risks by

the investment community. A review of the 5-year

performance of major defense stocks relative to the

Standard & Poor index (figure 4-1) shows that they

performed far worse than the market average. As the

decade closed, reduced procurements of all major

weapon systems left the primes with both surplus

production capacity and a lack of capital needed to

undertake new weapons developments.

Table 4-l—Trends in the Current Base

. Extensive but declining R&D capability

● Continuing surplus production capacity in primes

. Declining number of subtier suppliers

. Continued limited access to civilian technology

. increasing costs of production

. Consolidating maintenance and repair capability

● increasing globalization of all three elements of the base

SOURCE: Office of Technology Assessment, 1991.
66 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Box 4-A—How Government Auditing Requirements Isolate the Defense Industry

Government-imposed accounting practice tends to isolate the defense industry from the rest of the economy.

While some real technical barriers prevent complete integration—military products sometimes require unique

characteristics or processes-technical differences alone cannot explain the great degree to which military and

civilian production is separated. With few exceptions, companies that do both military and commercial work set

up special government-products divisions to do the defense work, even when the military and civilian technology

is similar enough that economies of scale would accrue by keeping production under one roof.

Defense industry executives claim that work is separated primarily because of the government auditing

requirements needed to calculate prices. Without a market to set prices through supply and demand, the government

has sought to establish prices of military materiel by calculating costs and adding a percentage profit. (This approach

also meets political requirements to limit profits on public contracts to “reasonable” levels.) Companies with DoD

contracts must keep track of costs in a manner specified by the government, and must allow the government access

to these cost records.

The combination of accounting practice and government access forces companies to separate government and

commercial work, for several reasons. First, government accounting practice does not conform to modem

commercial standards of accounting. For example, ledger entries and cancelled checks without invoices may not

be adequate records of costs for government contracts. Information required by government accounting standards

may not be useful to a commercial operation, or it may be judged too expensive to collect. In general, government

contracts require far greater detail in allocating costs than do commercial management information systems, and

errors in accounting on government contracts can bring criminal charges against business executives, causing them

to devote inordinate amounts of effort to matters of no commercial consequence. Commercial firms cannot achieve

consistency by adopting government standards because the added cost of government accounting procedures must

be borne ultimately by the customers, placing the firm at a commercial price disadvantage relative to firms that do

no government work. Moreover, the auditing burden is passed along with subcontracts.

Firms must not only collect cost information but open their books to U.S. Government auditors. Title 10 of the

U.S. Code, section 2313 states that “an authorized representative” of the government “is entitled. . .to inspect the

plant and audit the books and records” of contractors and subcontractors carrying out cost-based contracts. For 3

years after final payment, the government ‘shall have the right to examine any books, documents, papers, or records

of the contractor, or any of his subcontractors, that directly pertain to, and involve transactions relating to, the

contract or subcontract. ’ These rights of inspection extend to negotiated fixed-price and competitively bid contracts

and when the product has been sold on the commercial market. Thus, even in cases where competition should, in

theory, assure the government a fair—if not the lowest—price, costs are audited to insure that profits are reasonable.

The only exception to the auditing requirement is when contracts are awarded strictly on the basis of price.1 This

exception actually undermines efforts to award contracts based on best value rather than lowest cost. Section

2306(f)(2) expands governmental inspection rights to data regarding negotiation and pricing of a contract.

Court decisions have established the government’s right to examine company accounting records covered by

these regulations for the sole purpose of collecting information, even if the aim is not cost verification.2 If a company

thoroughly integrated its civil and military production, then virtually no company information would be excluded

from such government audits. In the end, most companies choose to set up a separate government-products division

rather than try to untangle overhead and other charges between commercial and government work or to allow

government inspectors access to their commercial books.

14~section 331.20(f)(2).

2S~”thk/ine Cow. V. S@ZtS 668F.2d 201 (3d. CIR.) cert. denied, 461 U.S. 913 (1981). established that the gove~ent co~d tive access

to cost information even if it was desired for research on contracting procedures.

One result of these problems is the declining example, subtiers have less liquid capital on hand to

number of suppliers willing or able to perform keep them in business during major downturns in the

defense work. Small subtier firms have, for a variety defense market, and they are less capable of dealing

of reasons, even less flexibility than primes or large with the burdens of defense-acquisition regulations

subcontractors in adapting to changes in procure- such as auditing requirements and military specifiment laws and reduced defense spending. For cations. The potential loss of proprietary data rights
Chapter 4--Trends and Problems in the Base . 67

Figure 4-l—Five-Year Stock Price Performance of

Major Defense Firms Relative to S&P 500,

Dec. 31, 1984-Dec. 31, 1989 -

Boeing

Raytheon

GM Hughes*

Rockwell

United Technologies

Martin Marietta

T RW

E-Systems

Loral

Allied-Signal

Lockheed

McDonnell Douglas

General Dynamics

Grumman

Northrop

-80% -60% -40% -20% O%

Relative percentage change

*4- year performance

SOURCE: Paine Webber Inc.

20%

is seen as a direct threat to survival by small,

specialized firms in all technical areas but particularly in the software field.

The subtiers also have been affected adversely by

strategies employed by prime contractors to deal

with cuts in defense spending. For example, when

prime contractors make overseas sales, the purchasers often demand offsets, in which the seller agrees

to let the buyer manufacture parts or components of

the weapon system or some unrelated product as a

condition of the sale. According to the Defense

Science Board, “Not only do such offsets result in

reduced subtier profitability and cash flow, but they

also require the transfer of data to a future competitor.’ For example, when General Dynamics sold

F-16s to the Netherlands, it required Menasco Texas,

a producer of aircraft landing gear, to teach a Dutch

firm how to make the product; the Dutch firm now

competes with Menasco.3 Subtiers also contend they

are forced by primes to accept a disproportionate

share of program cost and risk.4 Further, subtier

firms are under growing competitive pressure from

large defense contractors that are expanding their

defense business base to improve their market

position. Several small firms surveyed by OTA

argued that the diversification of large firms into

technical niches now occupied by subtiers would

result in loss of business and reduced quality for the

government customer.

Subtier firms are not optimistic about their ability

to adapt successfully to a downsized DTIB. Many of

the smaller firms surveyed by OTA are trying to

move out of defense work, and some reported they

had already done so. Those planning to remain in the

field foresee an environment in which suppliers will

attempt to survive by underbidding to win contracts,

even if the result is poor performance and cost

overruns, and by curtailing IR&D, training, and

other long-term investments just to keep the doors

open. One firm summed up the situation by predicting that the industry will behave like a pack of dogs

trying to subsist on a food supply adequate for half

its number. Many will die horrible deaths, and the

survivors will be weak and unhealthy.

While the transition to a downsized DTIB maybe

particularly difficult for smaller firms serving niche

markets, from a national perspective the supplier

base will have to shrink. The challenge will be to

maintain sufficient capability and competition to

promote price discipline and technical innovation in

this important element of the base. These objectives

might be accomplished if large prime contractors

move component production in-house, or if small

firms diversify into the civil sector. In order to

motivate diversified subtiers to remain in the defense sector, it will be necessary to make defense

work more attractive through changes in acquisition

laws, particularly as they relate to technical data

rights claimed by the Government. Strategies for the

transition are discussed in greater detail in chapter 5.

SPECIFIC ISSUES

In addition to these general conditions and trends

in the current DTIB, there are several specific issues

that have a direct effect on the nature and composition of the base:

Disincentives for Manufacturing Investment

The procurement regulations imposed by the

Federal Government discourage corporate investment

in manufacturing technology for a number of reasons. First, regulations often specify production

@fflceof the Under Secretary of Defense for Acquisition The Defense Industrz”al and Technology Base, vol. ZZ: Subgroups Appendices (Washington

DC: December 1988), p. 137.

sEileen ~te, “Tool of Trade,” Wall Street JournaZ, Sept. 10, 1987, p. Al.

‘@Klce of the Under Secretary of Defense for AequisitioU op. cit., footnote 2, pp. 136-137.
68 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Photo General 

Field radios, built according to military specifications

and procedures mandated by the government, must be

shock-tested with this hammer.

procedures and tests, so that firms cannot make

manufacturing innovations without explicit contract

authority. While authorization is possible, it can be

so costly and time-consuming that firms avoid

making modifications that could improve productivity. Second, as discussed in chapter 3, limits on

contractor profits reduce incentives for firms to

invest in greater production efficiency. Third, the

requirement to compete for future short-term production contracts means that a firm may not recover

an investment in improved manufacturing technology if the resulting immediate costs keep it from

winning a future contract. Fourth, the general

uncertainty in defense programs and spending levels

provides strong incentives to seek short-term profits.

In this environment, some firms have sought to

become a competitive second source by bidding on

a production contract after the development has been

carried out by another firm. If the developer is

attempting to recover company-funded R&D expenses, the second source will be able to produce at

lower cost, greater profit, or both. The very success

of this strategy suggests that the current procurement

system gives rise to perverse incentives, since

winning a development contract should not penalize

a firm in the subsequent competition for the production contract. Many of these perverse incentives will

have to be removed as the Nation moves to a smaller

DTIB.

Inappropriate Competition

Congress and the Nation have long evinced a deep

faith in competition to improve efficiency and

control costs. Some defense analysts support this

view, arguing, for example, that dual-sourcing has

yielded better designs and quality, lower production

costs, and reduced maintenance costs.5 But critics

contend that while competition is good in theory, as

currently practiced by the Department of Defense

(DoD), it has raised costs, inhibited productivity

investments, and slowed innovation. Some contend

that more competition is not necessary and that the

system would function better with fewer, but more

qualified, competitors. Further, in the area of R&D,

teaming and cooperation may be more beneficial

than a purely competitive approach.

Congress’ belief in the virtues of competition is

embodied in the Competition in Contracting Act

(CICA), Public Law 98-369, Title VII, July 18,

1984, 98 Stat. 1175, which requires “full and open

competition’ in Federal acquisition programs. The

meaning of “full and open competition” rests

ultimately on the definition of a responsible offeror.

Title 41 of the U.S. Code, Section 403, defines

“responsible source’ as a prospective contractor

that has adequate financial resources, facilities,

organization, and technical skills to carry out the

contract, as well as a satisfactory performance

history and record of integrity and business ethics.

Both the general and defense-specific procurement statutes also enumerate several exceptions

under which a Federal agency may limit the number

of potential bidders. Such noncompetitive bidding

procedures may be invoked when:

1.

2.

3.

4.

the needed property or services are available

from only one “responsible” source or a

limited number of sources;

the agency’s need is of such “unusual or

compelling urgency” that it would suffer

injury unless it limits the number of bidders;

the contract must be awarded to a particular

source in order to maintain a vital industrial or

R&D capability;

an international treaty or agreement mandates

noncompetitive procedures;

 Affording (Cambridge, MA: 
Chapter &Trends and Problems in the Base . 69

5.

6.

7.

a statute requires that the procurement be made

from a specified source;

wide disclosure of the agency’s needs would

compromise national security; or

the Secretary of Defense (or other agency

head) determines that it is necessary “in the

public interest” to use noncompetitive procedures in a given case, and notifies Congress of

this determination at least 30 days before

contract award.

The statutes also state, however, that a Federal

agency may only award a contract using noncompetitive procedures after the contracting officer has

justified the use of the exemption in writing and

certified its accuracy. Explicit approval from procurement authorities must then be obtained, at a

bureaucratic level determined by the size of the

contract. The competition rules are further enforced

through a bid-protest mechanism. In general, the

incentive structure of the defense procurement

bureaucracy encourages conservatism in pursuing

noncompetitive exemptions that would be justified

under the statute. This is because applying for an

exemption is time-consuming, can trigger a bid- protest proceeding and hence a costly delay in

starting the program, and can potentially involve the

responsible contracting office in litigation. Yet the

office runs no risk by failing to apply for an

exemption when it is warranted.

In the view of both industry and government,

CICA has been a double-edged sword. While the Act

has increased contracting opportunities by opening

up formerly sole-source programs to competitive

procurement, it has had numerous unintended harmful effects. The OTA survey revealed that while

most firms favor the idea of competition and do not

seek the repeal of CICA, they believe the Act has

been applied in an inflexible and counterproductive

manner. In particular, government agencies have

generally interpreted the Act as requiring competition under all circumstances, strictly on the basis of

price. By technically leveling all competitors and

then awarding to the lowest priced bidder, CICA has

tended to remove sound business judgment from the

procurement process. In the OTA survey, industry

made a number of recommendations for change (see

box 4-B).

Photo credit: U.S. of Defense

Modern military equipment from a variety of suppliers is

increasingly sold in international arms markets, such as

these Israeli products displayed at the Paris Air Show.

Increasing Globalization of the Defense Base

The internationalization of the DTIB is part of the

evolution toward a global economic system. As the

Defense Science Board has observed: “Globalization not only means dependence on foreign sources

for raw materials but also for manufactured products

. . . . [M]ore and more, defense systems require

foreign manufactured components and assembly.” G

Almost all U.S. weapon systems contain component

parts from foreign sources, predominantly incorporating “dual-use” technologies with both military

and civilian applications, such as microelectronic

chips, composite materials, and flat-panel displays.

The use of foreign sources may not be large in dollar

terms, but it often involves key components. Although there are no reported cases of the United

States’ failing to receive components from allied

suppliers in wartime, U.S. firms have claimed that

lack of access to certain key components has delayed

production of civilian products in peacetime. In

response, the Defense Science Board has argued that

the United States must have assured access to

technologies it defines as critical.

Changing R&D Priorities

DoD’s current plans call for holding funding for

research and exploratory development relatively

 of the Under Secretary of Defense for Acquisition Defense and Technology Base, vol. 1, October 1988, p. 11.
70 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

OTA DEFENSE INDUSTRY SURVEY

Box 4-B—Problems With the Competition in Contracting Act (CICA)

Surveyed firms argued that CICA as implemented has had the following adverse consequences:

●

●

●

Fiscal Damage-CICA has generated “artificial” competition for its own sake, without evaluating

suppliers on their true merits or giving the Department of Defense (DoD) the most cost-effective solution.

By basing evaluations strictly on price, without due consideration of quality or past performance, the Act

has enabled unqualified firms to ‘‘buy in” at the expense of quality producers. CICA has also opened the

door to bidding abuses. In particular, low-overhead, “build-to-print” companies have used aggressive

pricing techniques to win production contracts after other firms complete the development work. Once the

government has accepted an unrealistically low bid, it may later be forced either to modify the contract when

the firm cannot meet its terms or seek an alternative contractor. For example, one company reported that DoD

had dropped it in favor of a competitor who made a lower bid, only to return when the latter was unable to

deliver. By that time, however, the first contractor had been hurt financially by the loss of the original contract.

Eroding Technology Base--C1CA has reduced industry investment in R&D and eroded the Nation’s defense

technology base, for a number of reasons. Fret, CICA has caused firms to expend additional resources on

bid & proposal (B&P) for programs where they could have been justified as sole-source. This increase in

B&P costs has lowered the firms’ investment in independent research and development (IR&D), Second,

fostering competition through dual-sourcing has been a major disincentive to invest in technology

development. Since all innovations will ultimately be made available to a second source, firms are generally

unwilling to make investments in new technology that the government will then transfer to a competitor.

Third, the government has held competitions for production runs that are too small to maintain corporate

R&D capabilities or to cover new manufacturing investments. This practice has reduced R&D and inhibited

productivity improvements. Fourth, the government practice of purchasing a significant portion of military

spare parts from low-cost parts suppliers has had a negative effect on contractors who maintain design and

development staffs. By depriving the developer of satisfactory rates of return on its initial engineering

investment, this policy also inhibits future incentives to invest in R&D and reduces the long-term capability

to manufacture components and parts. The net result of such actions by individual firms is the erosion of

the defense technology base.

Reduced Eficiency--By requiring a new competition for components and subsystems, CICA has inhibited

the development of long-term relationships between primes and subcontractors. As a result, it has limited

the introduction of improved management techniques [Just In Time (JIT) and Total Quality Management

(TQM)]. Industry argues that the procurement community, in its efforts to increase competition, has

sometimes spent more money creating new competitors for a program than it could have reasonably

expected to save through increased competition. Moreover, problems caused by enforced competition at the

subcontractor level must ultimately be borne by the prime. Finally, mandatory dual-sourcing is the wrong

policy for a shrinking defense market. Since declining budgets cannot support multiple sources for all goods,

spreading future contracts among many competing suppliers may not allow any one firm enough business

to remain healthy.

The firms surveyed argued that “effective competition” should replace ‘‘full and open competition’ as the

goal in procurement Accordingly, they suggested that CICA and the regulations derived from it be changed to make

clear that competition is merely one tool in the policy toolbox, to be used when necessary, reasonable, and

practicable. The firms made the following specific recommendations:

● Modify CICA to allow the government to procure under a “best value’ rather than lowest price standard,

so that the many factors affecting total cost-effectiveness can be considered.

* Enable a contractor to recoup nonrecurring R&D costs before a competitor is allowed to bid to manufacture

the product of the R&D.

● Limit competition to preselected qualified producers who have performed well on past contracts or meet

clear rules established for admitting newcomers.

* Interpret CICA to encourage long-term, predictable relationships between primes and suppliers.
Chapter 4-Trends and Problem in the Base ● 71

OTA DEFENSE INDUSTRY SURVEY

Box 4-C—Industry Views on Research and Development

All surveyed industry executives recognized the current close link between R&D and production and expressed

concern about the expected decline in tiding. A minority suggested dealing with this problem by adjusting

production to minimize disruption to R&D. For example, smaller procurements could be stretched out over long,

slow production runs to allow steadier, albeit lower, financial support for design teams. Alternately, the current

approach-of rapidly ramping up production, meeting deployment requirements quickly, and then ramping

down--could be modified to include planning from the outset for frequent upgrades of deployed systems. At the

very least, when government contracts are awarded, the quality and cost of the research and engineering performed

by the production house should be considered in evaluating competing bids. Otherwise, those firms that neglect

long-term research will always underbid those that fund research, to the eventual detriment of the Nation’s defense

technology base.

The majority view of the surveyed firms is that fundamental changes are required in the government approach

to funding and directing military R&D. If the government wants to maintain R&D in spite of reduced procurement

levels, then R&D must be made profitable in its own right. Currently, the few research contracts not aimed at specific

development programs, while welcome, make an insignificant contribution to overall R&D requirements. Surveyed

firms believe that government laboratories will protect their own budgets at the expense of industry capabilities,

exacerbating the separation of research and production. To the extent such a shift occurs, however, the firms argued

strongly that the results of R&D by government laboratories must be made widely available.

Many respondents see value in maintaining technological capability through vigorous, government-funded

prototyping. Without the urgency created by the Soviet threat, the weapon development process could be slower

and more deliberate. Ideas could be tested more thoroughly before entering production, and small-scale production

runs could allow field testing before committing to large-scale production. Other respondents suggest that despite

the lack of new weapon platforms, innovation can be maintained by upgrading existing weapons.

Many small firms are built around a single specialized skill or technology. Such firms survive only by

protecting their proprietary technical data and many therefore refuse government R&D funding, which could

compromise their competitive edge by requiring the transfer of company data to other manufacturers. Any future

plan for direct government funding of R&D will have to address the concerns of these specialized firms.

At the same time, almost all surveyed firms are wary of developing technology to “put on the shelf” because

of the problems associated with moving from development to production. New development tools, such as

computer-aided design and concurrent engineering, may reduce these problems in the future. Uncertainties about

manufacturing might also be resolved by occasionally pursuing limited production runs and by increasing the

importance of producibility as one of the criteria by which a new design is evaluated.

constant. Because the defense industry’s investment

in R&D is linked to procurement, however, overall

funding may decline as a result of reduced recovery

of IR&D and as firms spend less of their profits on

research. In addition, the transformation of the

international security environment is expected to

slow the pace of defense R&D and to lengthen

weapon procurement cycles. Firms anticipate more

investment in new components that can be retrofitted to existing platforms, rather than replacements

for the platforms themselves (see box 4-C).

R&D organizations recognize that the diminution

of the Soviet threat will result in an increase in the

relative importance of threats in other parts of the

world, and are considering a shift in R&D priorities.

For example, the United States is currently the world

leader in strategic antisubmarine warfare (ASW)

technologies directed toward detecting large Soviet

nuclear submarines in the open ocean. As the

immediacy of the Soviet strategic threat declines, the

Navy may want to restructure its ASW research

effort to place greater emphasis on detecting small

electric submarines in shallow water.
72 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base
Chapter 4--Trends and Problems in the Base . 73

Diminishing Industrial Capabilities

Many key defense sectors are shrinking rapidly to

only a few or single producers. Shipbuilding is one

sector that has experienced a major decline over the

past two decades: the number of shipyards capable

of building large ships fell from 37 in 1982 to 20 in

1990. Today, there is essentially no commercial

shipbuilding in the United States, and private

shipyards are totally dependent on U.S. Government

contracts for survival.7 Armored vehicle production

has also been reduced to only a few sources.

Although many components of these weapon systems could be procured from the commercial sector,

the end-items cannot.

Management Inertia

The Defense Management Review (DMR) undertaken by Secretary of Defense Cheney addressed

acquisition practices and procedures, as well as

defense planning, government-industry accountability, and personnel and organization. The Review

resulted in a number of recommendations for acquisition reform, many of which still have not been

implemented. For example, while the DMR called

for more stability in funding and noted the savings

that might accrue from multiyear contracting, the

OTA survey and subsequent industry interviews

found almost no improvement in this area.

The DMR also called for reducing reporting

requirements and regulations that inhibit “sound

procurement policies such as ‘best value’ competitive practices and the buying of commerciallyavailable products. . and that impose unnecessary

reports and reviews on program offices and contractors." 8 Again, the OTA survey and interviews

revealed continuing problems in all these areas.

The national management of the DTIB is currently inadequate to deal with the challenges of the

transition to a downsized base. Management problems that raise the costs of developing and producing

new weapon systems have been identified many

times, but consensus on dealing with these problems

does not yet exist. As a result, these well-identified

problems persist.

CURRENT GOVERNMENT AND

INDUSTRY STRATEGIES

The OTA assessment team has not identified any

overall government strategy to manage the changes

in the DTIB and ensure that a viable base will exist

in the future. There are, however, a variety of

uncoordinated strategies being pursued by the Office

of the Secretary of Defense (OSD), the Services, and

Congress. Secretary of Defense Cheney’s Defense

Management Review noted that steps are being

taken to revamp some of the regulations that

increase costs, reduce efficiency, and thus isolate

defense production from the commercial sector. In

addition, the Department of Defense’s Joint Depot

Consolidation Plan is designed to save money by

rationalizing maintenance and overhaul work in

Service depots. The Services are also in the process

of consolidating research and development facilities. In recent months, the Air Force has been

studying ways to maintain aviation design capabilities, and the Army has commissioned studies on its

future DTIB needs. Finally, as a result of congressional prodding, OSD is revamping the Manufacturing Technology (MANTECH) program.

Concern over the perceived problems in the

technology base of both defense and civilian sectors

has led to a number of recent initiatives. One has

been the identification of key national defense

technologies. For example, the 1989 Defense Authorization Act requires the Secretary of Defense to

. . . submit to the Committees on Armed Services of

the Senate and the House of Representatives an

annual plan for developing the technologies considered by the Secretary of Defense and Secretary of

Energy to be the technologies most critical to

ensuring the long-term qualitative superiority of

United States weapons systems.9

This effort was supplemented by a report on

supporting industries, which was published in response to requirements in the 1990 Defense Authorization Act. Other “critical technologies” lists have

been requested by Congress and subsequently published by the Department of Commerce and the

~aval Sea Systems Cornmand, Corporate Operations Directorate, United States Shipbuilding Industry, briefing papers, July 1990.

gs~~ of Defense Dick Cheney, D@eme Management Report to the President, Department of Defense, JUIY 1989, PP. 11-12.

%partment of Defense, Critical Technologies Plan, prepared for the Conunittees on Armed Services, U.S. Congress (Washingto~ DC: Oftlce of

the Secretary of Defense, Mar. 15, 1990), p. 1.
74 ● Redesigning Defense: planning the Transition to the Future U.S. Defense industrial Base

Table 4-2—Comparison of National Critical Technologies With Department of Commerce Emerging Technologies

and Department of Defense Critical Technologies

National Critical Technologies Commerce Emerging Technologiesa Defense Critical Technologiesb

Materials

. Materials synthesis and processing . Advanced materials . Composite materials

. Electronic and photonlc materials . Advanced semiconductor devices . Semiconductor materials and

. Superconductors microelectronic circuits

● Superconductors

. Ceramics

● Composites ● Advanced materials ● Composite materials

● High-performance metals and alloys

Manufacturing

* Flexible computer-integrated . Flexible computer-integrated

manufacturing manufacturing

. Intelligent processing equipment ● Artificial intelligence ● Machine intelligence and robotics

● Micro- and nanofabrication

● Systems management technologies

information and communications

*

●

●

●

●

●

●

Software

Microelectronics and optoelectronics

High-performance computing and

networking

High-definition imaging and displays

Sensors and signal processing

Data storage and peripherals

Computer simulation and modeling

●

●

●

●

●

●

●

●

High-performance computing

Advanced semiconductor devices

Optoelectronics

High-performance computing

Digital imaging

Sensor technology

High-density data storage

High-performance computing

●

●

●

●

●

●

●

●

●

●

●

●

Software producibility

Semiconductor materials and

microelectronic circuits

Photonics

Parallel computer architectures

Data fusion

Signal processing

Passive sensors

Sensitive radars

Machine intelligence and robotics

Photonics

Simulation and modeling

Computational fluid dynamics

Biotechnology and life sciences

. Applied molecular biology ● Biotechnology ● Biotechnology materials and processes

● Medical technology . Medical devices and diagnostics

Aeronautics and space transportation

● Aeronautics ● Air-breathing propulsion

● Surface transportation technologies

Energy and environment

● Energy technologies

● Pollution minimization, remediation,

and waste management

● No National Critical Technologies counterpart: High-energy-density materials, Hypervelocity projectiles, Pulsed power, Signature control, Weapon system environment.

a U.S., Department of Commerce, Emerging Techno/ogies:A survey of Technica/ and Economic @pomnities, Spring 1990.

b us. Department of Defense, Critical Tdno/ogies plan, Mar. 15, 1990.

SOURCE: Executive Office of the President, Office of Science and Technology Policy, Flepofi of the Nationa/ Crifica/ Technologies Pane/, March 1991.

White House Office of Science and Technology

Policy (see table 4-2). To date, however, these

efforts have been generally criticized as failing to

provide an investment strategy for the future.

In the absence of a coherent government strategy

for the DTIB, defense contractors are taking a

number of steps to adapt to the new environment.

The main strategies are outlined below.

Consolidation

Firms are attempting to become leaner and more

efficient through consolidation efforts that include

laying off workers, using temporary workers and

consultants, reducing floor space, selling excess

assets, and cutting back on both R&D investments

and capital expenditures for military programs.

Some have brought component manufacturing in-
Chapter 4--Trends and Problems in the Base . 75

house. While such actions can have a positive

short-term effect on costs, they can have a negative

long-term effort on R&D and manufacturing skills.

Concentration on Defense Work

Some firms are focusing on defense work, which

despite the downturn is likely to amount to about

$100 billion in defense R&D and weapon procurement (including equipment purchased from industry

for operation and maintenance). Industry executives

argue, however, that maintaining a constant share of

a diminishing market will make their firms unattractive investments. These firms must therefore expand

their share of the reduced defense business either by

increasing relative market share of current defense

products or by moving into other defense product

lines. Firms that survive using this strategy will be

more diversified within the defense sector. They will

have also eliminated many of their direct rivals and

may increasingly become sole-source ‘‘arsenals”

for key weapon systems.

Diversification

An alternative strategy being followed by some

firms is diversification outside the defense market

by acquiring new capabilities or redirecting current

ones. Indeed, some business analysts argue that DoD

procurement should, in the future, favor diversified

firms over nondiversified fins. These analysts

argue that only a diversified firm will be “strong

enough to turn down a poor defense contract’ and

thus avoid repeating some of the severe financial

mistakes related to freed-price development contracts. Another diversification strategy is to engage

in joint ventures and teaming arrangements. By

pooling financial resources, technology, and skilled

labor, two or more firms can enter a market where a

single firm could not compete on its own.

There are, however, problems with diversification. Well-known “horror stories” include the

largely unsuccessful attempts by aerospace firms

like Grumman and Boeing Vertol to enter the mass

transportation market in the 1970’s. But there are

also examples of successful diversification: Rockwell International and Raytheon have greatly reduced their dependence on defense contracts since

the early 1980’s. To the extent that firms offset

defense cutbacks with growth in commercial sales

involving similar technologies, they can mitigate the

adverse effects on overall military production capabilities of declining DoD procurement. Diversification could therefore support a strategy of increased

civil/military integration. Recent legislation seeks to

ease diversification into commercial markets by

allocating $200 million from the defense budget for

conversion of defense industries to civil production.

Arms Exports

Another corporate strategy for adjusting to defense budgets is to expand internationally by seeking

foreign investment and market access, forming

strategic alliances with foreign partners, and participating in multinational codevelopment and coproduction programs. Foreign sales could maintain

warm production lines for major weapon systems,

aid U.S. defense industrial responsiveness, and help

pay for additional research and development. Nevertheless, this strategy faces a number of important

challenges, including export controls (see box 4-D)

and an increasingly soft international arms market.

Not only has the end of the cold war significantly

reduced domestic markets of the major producing

countries, but the Third World arms market has

declined as well. In constant-dollar terms, Third

World arms sales fell by one-half between 1982 and

Box 4-D—Export Control Laws

Export controls are governed by the Arms Export Control Act of 1976, which regulates the transfer of military

equipment and technologies, and the Export Admini “ “stration Act of 1979 (as amended), which controls the export

of those dual-use technologies that could significantly enhance the military capabilities of a potential adversary.

Defense Exports

Two types of exports of defense equipment are regulated by the Arms Export Control Act: Foreign Military

Sales (FMS) and direct commercial sales. Under the FMS process, a U.S. defense contractor sells the equipment

Continued on next page
76 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Box 4-D—Export Control Laws-Continued

to the U.S. Government, which then delivers it. Since the U.S. Government serves as an intermediary, the company

need not apply for a separate export license, but it must ask the same price it would charge the government for a

domestic sale and comply with all U.S. military specifications.

U.S. defense contractors generally prefer direct commercial sales because they provide greater flexibility and

profit. The firm can charge what the market will bear and the equipment does not have to meet U.S. military

specifications. Nevertheless, direct sales require obtaining an export license, which is a complex and

time-consuming process. Although FMS sales remain the primary mechanism for arms transfers, since 1983 there

has been a steep increase in direct commercial sales.

Role of the Congress

The State Department must report annually all license requests for the export of major defense equipment

costing $7 million or more, or any other defense articles or services over $25 million, at least 30 days before the

license is issued. Congress may also request a report on the capabilities of the weapon being exported.1 This

notification process is designed to ensure that Congress can block a proposed sale if it chooses to do so.

Congress has prohibited arms transfers to some countries, restricted re-exports to third parties, and earmarked

more than 90 percent of Foreign Military Financing (FMF) of foreign arms sales, thereby reducing the ability of

the executive branch to make grant funding available to other countries.2 At the same time, Congress has exercised

relatively little control over the FMS program, giving the executive branch considerable latitude in arms sales and

transfers of defense technology, and it does not review proposed commercial sales in detail. In the wake of Operation

Desert Storm, however, Congress may seek greater restrictions on conventional arms sales.

Exports of Dual-Use Technologies

U.S. export-control policy involves balancing two competing interests: giving U.S. companies a freehand in

competing for foreign markets, and reducing the threat to U.S. security from the export of militarily relevant goods

and technologies. The United States controls exports of dual-use technologies under the Export Admini “ “stration Act

and coordinates its policies with allies through the Paris-based Coordinating Committee for Multilateral Export

Controls (COCOM).3 In a process begun in June 1990 and completed in May 1991, COCOM replaced its previous

industrial control list with a much shorter ‘core list’ by decontrolling many items and reducing controls on others.

In some cases, the United States controls items that the other COCOM countries do not. An example is

so-called West-West’ licensing requirements: the need to obtain licenses for technology exports to allies and other

non-Communist countries. Such licenses are designed to prevent the diversion to the Soviet Union, China, and their

allies of technologies sold to customers in Western countries. In addition, the United States is the only COCOM

member to require a reexport license before foreign goods containing controlled U.S. components can be sold to

third countries.

These unilateral export controls result in considerable expense, delay, and uncertainty for U.S. firms, and may

cause them to lose out to foreign competitors that are not similarly constrained. According to a recent report by the

National Academy of Sciences (NAS), the negative economic effects of export controls have resulted almost

entirely from the unilateral aspects of U.S. policy.4 Yet except in rare cases, unilateral U.S. controls do not

significantly affect the availability of dual-use technologies to the proscribed countries. The NAS report

recommends that such controls be eliminated except in those relatively few cases where unilateral action can be

effective.

lpaul Y. Hammond et al., The Reluctant Supplier: U.S. Decisionmaking for Arms Sales (Cmtidge, MA: @lge@@WL GUIIII & U

1983), p. 95.

2U.S. Congress, Office of lkchnology Assessment Global Arms Trade, OTA-ISC-460 (Washin@o% DC: U.S Gov ea’nrnent Printing

Ofilce, June 1991), p. 20.

3C~OM ~n~ol~ eqo~ of d~-u~e ~hnolo@es to the Soviet Unioq _~d ~i.r Wm. Nonproljf~tion of &ChllOIO@M fOI

unconventional weapons (e.g., nuclear, chemical, biological, and Wtic rnissiles>whieh the Soviet Union and China already possess-is

addressed in other forurns.

4Natio~ ~d~y of s~~ms, Finding co-n Ground: U.S. EXpOH con~ols in a c~nged GIo/xzl Environment (%@hh@& ~:

National Academy Press, 1991), pp. 19-20.
Chapter 4--Trends and Problems in the Base ● 77

1989. 10 At the same time, there is growing competition from both traditional arms exporters and emerging defense industries, such as those of Brazil and

China.11

SUMMARY

The current trends in the DTIB are considered to

be largely unfavorable because of:

1. regulatory controls that have increased the cost

of conducting defense business and discouraged many firms from participating in defense

efforts, and

2. the lack of any overall strategy enabling both

private firms and government organizations to

prepare for the future.

In the absence of a DTIB strategy, and under the

pressures of current regulatory practices, firms are

taking actions simply to survive rather than to

position themselves for future business. Chapter 5

addresses some of the issues entailed in developing

such a strategy. It outlines desirable characteristics

of a future DTIB and the strategic choices and

tactical decisions involved in the transition.

&

l~o G-et~ “Trends in Conventional Arms Transfers to the Third World by Major Suppliers, 1982-89,” Congressional Research Service, June

1990.
Chapter 5

Framing the Debate
Contents

FUTURE U.S. FORCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DESIRABLE CHARACTERISTICS OF THE FUTURE BASE . . . . . . . . . . . . . . . . . . . . .

STRATEGIC CHOICES FOR THE FUTURE BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Interdependence v. National Autonomy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Arsenal System v. Civilian Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current v. Potential Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TACTICAL DECISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advanced R&D Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Design and prototyping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Responsive Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mobilizable Production Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Maintenance and Overhaul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Good, Integrated Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Box

5-A.

5-B.

5-1.

5-2.

5-3.

Boxes

Page

81

81

84

84

87

89

92

92

94

96

98

101

101

102

Page

Civil-Military Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

How Production Planning Affects Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **.....* 99

DTIB Choices . . . . . . . .

Alternative Research Strategies..

Dual-Track Prototyping Strategy

Figures

Page

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Tables

Page

5-1. Characteristics of FutureU. S. Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

5-2. Desirable Characteristics of Future Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

5-3. Desert Shield/Storm Immediate Response Requirements . . . . . . . . . . . . . . . . . . . . . . . . 97
Chapter 5

Framing the Debate

The preceding chapters have examined the future

U.S. military needs that must be supported by the

defense technology and industrial base (DTIB) and

the structure, condition, and trends of the current

base. With this background, we can now consider the

transition to the future base and the implications of

alternative policies. This chapter identifies some

desirable characteristics of the future DTIB and

explores the strategic choices and tactical decisions

involved in moving to and maintaining the future

base.

FUTURE U.S. FORCES

Future U.S. forces, as described in chapter 2, are

likely to be smaller, engaged in areas other than

Europe, less forward-based, and sufficiently mobile

to support operations from the continental United

States (table 5-l). With smaller active forces, the

U.S. military will also become more dependent on

the mobilization and long-term reconstitution of

forces to counter either a renewed Soviet threat or a

new “great power’ threat.

U.S. national security planners will continue to

stress high-performance weapons. The Nation has

traditionally been reluctant to expose its forces to

unnecessary battlefield risks, and probably only in

the case of a direct threat to national survival would

the American public tolerate high U.S. casualties.

For this reason, the United States has opted since

World War II for superior weapon performance over

raw numbers. Despite the diminished Soviet threat,

the Persian Gulf War demonstrated the utility of

high-performance weapons in attacking critical targets and reducing U.S. casualties, strengthening the

long-held U.S. preference for superior weapons to

counter any adversary.

Nuclear weapons will remain a fundamental

element of the U.S. military deterrent, although the

Table 5-l-Characteristics of Future U.S. Forces

. Smaller active and ready reserve forces

. Less forward basing, greater strategic mobility

. Continuing weapons performance advantage

● Substantial nuclear capability

. Chemical and biological defense capabilities

. Greater dependence on mobilization

number and composition of these weapons will

change in response to changes in the Soviet Union,

arms control treaties, and the emergence of new

nuclear-weapons states over the next decade. Although the Biological Weapons Convention was

signed in 1972 and negotiations are currently under

way to eliminate chemical weapons, biological- and

chemical-warfare agents are a growing threat to U.S.

forces operating in the Third World and may require

the development of improved defenses.

DESIRABLE CHARACTERISTICS

OF THE FUTURE BASE

The future DTIB will still need to meet the two

objectives outlined earlier in this report:

1. affordable development and peacetime acquisition of high-performance weapons, and

2. the responsive production of weapons and

supporting equipment in crisis or war.

These objectives, the force structures and operations

outlined above, and projected fiscal constraints

suggest some desirable characteristics of the future

DTIB that are summarized in table 5-2.

Preserving an advanced research and development capability is the highest priority over the next

decade. While production funding will still greatly

exceed R&D funding, there should be a relative shift

in funding priorities. The ongoing need to deploy

high-performance weapons and to guard against

technological surprise necessitates a robust R&D

capability. The R&D component of the base will

continue to consist of some combination of private

and government organizations, but a fundamental

Table 5-2—Desirable Characteristics of Future Base

● Advanced research and development capability

. Ready access to civilian technology

. Continuous design and prototyping capability

. Limited, efficient peacetime engineering and production capabilities in key defense sectors

● Responsive production of ammunition, spares, and consumables for theater conflict

. Healthy, mobilizable civilian production capacity

. Robust maintenance and overhaul capability

. Good, integrated management

SOURCE: Office of TdnologyAssessment, 1991. Characteristics are not

SOURCE: Office of Technology Assessment, 1991. necessarily listed in order of priority.

–81–
82 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

question will be the allocation of resources between

these elements, as well as the overall level of R&D

funding.

In the current DTIB, the R&D emphasis is on

systems development for production. In the future,

the emphasis will be on technology demonstration,

prototyping, and potential production. Since the

reduced Soviet threat will allow for slower deployment of new weapon systems and more deliberate

development schedules, the Nation can afford to

invest relatively more in research (budget categories

6.1 and 6.2). Moreover, the deployment of fewer

new weapon systems and platforms will increase the

relative importance of upgrades and component

changes in existing systems. The challenge for DTIB

planners will be to maintain an R&D capability that

hedges against technological surprise while concentrating on evolutionary developments.

The future defense base will need ready access to

civilian technology in as many areas as possible,

particularly sectors such as electronics and telecommunications where innovation is driven increasingly

by civilian applications rather than military requirements. Given the isolation of defense technology

from the civil base described in chapter 4, increased

civil-military integration will require changing current acquisition laws that make civilian integration

difficult.1

The future DTIB will also require a continuous

design and prototyping capability, in contrast to the

current intermittent development of prototypes,

which is largely oriented toward production. The

continuous development process might lead to a

dead-end or proceed to fabrication of prototypes,

full-scale engineering development, and limited

production, as illustrated earlier in figure 3-4.

Maintainin g a capability for design and development will be particularly difficult when far fewer

new types of weapons are produced. The reduction

in procurement funds is already having a direct

effect on maintaining design teams. Not only will

reduced procurement levels limit the resources

available for design and prototype work, but researchers and engineers may not wish to develop

systems that are never deployed. As discussed later

in this chapter, however, a properly managed competitive prototyping strategy can:

1. preserve design teams;

2. develop new concepts and materials;

3. help maintain manufacturing processes; and

4. if limited production and fielding occurs,

allow test of operational concepts.

Individual prototypes may be more expensive than

production items, but the use of a prototyping

approach might save funds over an entire program

while preserving competitive design and production

capabilities.

Although an emphasis on prototyping carries the

risk of erosion of manufacturing skills, and the

reduced expectation of future profits from production may reduce incentives to innovate, future fiscal

constraints will force the Nation to make hard

choices that include such risks. The challenge to

DTIB management is how to maintain innovation

and cost control in an environment in which the

current develop-to-produce approach is no longer

viable. A continuous prototyping strategy would

sustain R&D between procurement cycles, while the

combination of retrofits, upgrades, limited production for operational field testing, and force modernization would help maintain essential manufacturing

skills.

When prototyping reveals important new performance dimensions that provide a decisive operational advantage (such as stealth technology), force

modernization can be pursued using realistic production rates extended over long periods. This

approach would preserve limited, efficient peacetime engineering and production capabilities in key

defense sectors such as aerospace and armored

vehicles. While these capabilities would be more

limited than the current peacetime production base,

they would yield sufficient materiel to supply

deployed forces and would provide the foundation

for DTIB expansion to meet a reconstituted threat.

If future war-reserve stockpiles of ammunition

and other consumables are reduced in size in

proportion to the reduction to smaller active forces,

industrial responsiveness will assume relatively

greater importance for both small and medium-sized

contingencies. It has been reported, for example, that

over 25 percent of the U.S. stockpile of Tomahawk

conventional land attack missiles was fired in the

IJ@B~- Ja~es Gansler, ~d Ro* KuPP ~ Integrating Commercial and Military Technologies for National Strength: An Agenda for

Change (Washington, DC: Center for Strategic & International Studies, March 1991), pp. 85-95.
Chapter 5--Framing the Debate . 83

Photo credit: U.S. Department of Defense

The Tomahawk cruise missile proved effective in the

Persian Gulf War, but more than 25 percent of the

inventory was consumed.

frost week of war with Iraq,2 and other munitions

such as the Maverick antitank missile were also

consumed at high rates. While these rates could be

sustained from the war reserve stocks amassed to

counter a conventional Soviet threat in Europe, they

might not have been sustainable with stocks sized to

support a smaller active force.

Thus, in the future, a dedicated, rapidly responsive production capability will be needed to produce

selected items such as munitions, spare parts, and

other battlefield consumables. The size and responsiveness of this portion of the base would be related

to the size of war-reserve stocks, and it would differ

from the current capability in that surge requirements would be funded explicitly for selected items.

Such an approach would necessitate a realistic

assessment by regional military commanders of

requirements for theater conflict and the determination of clear priorities.

Because warning time of large-scale conventional

aggression would be on a scale of years, the United

States can afford to lower its military readiness

against a reconstituted threat and to rely for much of

its materiel on a healthy, mobilizable civilian

production capacity. This mobilizable base consists

of civilian plants and workers that could be transferred to defense production in an emergency,

expanding on the core elements of the DTIB

involved in peacetime procurement. As a result,

there would be diminished concern with detailed

defense-industrial preparedness for a major conflict

and greater emphasis on the general health and

composition of the larger industrial base. Developments in flexible manufacturing could also enhance

the value of the mobilizable civilian base by

allowing defense and civilian production on the

same lines. Even so, taking full advantage of civilian

production capacity would require changes in weapons design and greater emphasis on dual-use technologies.

The future DTIB will require a robust maintenance and overhaul capability that can support

fielded systems over an extended deployment life.

Over the coming decades, there will be a shift from

the urgent manufacturing and deployment of new

systems typical of the cold war era to increased

emphasis on the maintenance, remanufacturing, and

upgrading of deployed systems. The maintenance

base must be sufficiently responsive to support

theater conflicts. If properly managed, it could also

provide one means of preserving the Nation’s

defense production potential.

Finally, the DTIB must have good, integrated

management to achieve its objectives in a fiscally

constrained environment, avoiding both micromanagement and neglect. The test of good management

is whether the DTIB adequately meets the goals of

affordable peacetime acquisition and wartime responsiveness. Current base management does not

pass that test.

In sum, the future DTIB should be flexible,

research-intensive, integrated whenever possible

 W. “U.S. Fires Over 25% of Conventional Land Attack Tomahawks the First Week of War,” Aviation Week & Space

Technology, vol. 134, No. 4, Jan. 28, 1991, pp. 29-30.
84 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

with civilian technology and industry, and should

retain its orientation toward high-performance weapons. By integrating defense production more closely

with a healthy civilian industrial base, U.S. economic strength can help to deter military adventurism on the part of potential adversaries.

STRATEGIC CHOICES FOR

THE FUTURE BASE

A number of strategies have been proposed within

the defense community to meet future U.S. defense

technology and industrial needs. Some of these

strategies were originally suggested to deal with

problems identified in the current base, while others

are new. All of them stress broad policy choices,

such as the degree of the Nation’s defense-industrial

autonomy, the appropriate extent of competition for

defense contracts, the degree of integration of

defense and civilian industry, and the amount of

government intervention in the base.

At the Federal Government level, resource allocation involves choices between competing national

priorities. Decisionmakers must choose among allocating money for defense or for competing social

needs such as health care, the old dichotomy of

“guns versus butter.” The trend outlined in earlierchapters of this assessment, and already in evidence,

is for major reductions in defense spending and

relative increases for other national needs. Having

decided on the allocation of resources, decisionmakers must then structure the use of defense dollars

by developing an overall strategy for the various

U.S. Government agencies with national-security

responsibilities.

The following sections consider three broad

strategic choices that will continue to be central to

the debate over defense-industrial management:

1.

2.

3.

the degree of international interdependence

versus national autonomy,

the degree of reliance on the civil sector and a

market approach for production versus a regulated arsenal approach, and

the allocation of resources between deployed

weapons versus the potential to develop and

produce new weapons when needed.

In practice, the Nation will not pursue any one

strategic choice to the complete exclusion of the

other. Instead, the various defense industrial sectors

are positioned along a continuum according to a

weighing of the risks and benefits of applying a

particular strategy (see figure 5-l). On the national

autonomy/international-interdependence spectrum,

for example, the Nation seeks greatest autonomy in

the design and production of nuclear warheads,

long-range missiles, ships, aircraft, and tanks, and is

more willing to accept interdependence in electronic

components, machined parts, and raw materials. In

the case of the civil-integration/arsenal spectrum,

nuclear weapons and tank final assembly lend

themselves to arsenal production, whereas machined

parts, electronic components, and raw materials are

produced more efficiently by the civil sector. On the

deployed/potential spectrum, the declining largescale military threat allows the United States to

focus on the potential to respond to a reconstituted

threat through ongoing development and prototyping of major weapon systems such as tanks and

high-performance aircraft. In this way, the Nation

can maintain a core capability that can be expanded

if necessary, while producing sufficient equipment

to meet more likely theater threats. The three

strategic choices are also interrelated. For example,

greater reliance on the civil sector would result

inevitably in more international interdependence

because of the increasing globalization of civilian

technology.

Congress will play an important role in making

and implementing these strategic choices. Deciding

whether the Nation should emphasize its own

defense-industrial capabilities (“Buy American”)

or become more interdependent with allies will

require an examination of the implications of both

strategies. Increased reliance on the civil base

implies new approaches to procurement, in particular decisions about financial accountability. Shifting

to an arsenal system (including designated solesource producers in the private sector) will also

require a review of procurement laws that promote

wide competition for government contracts.

International Interdependence v.

National Autonomy

If the United States is weak in a military

technology defined as “critical,” the purchase of a

weapon system or component from the best available foreign source creates a conundrum, since in

making the purchase the United States improves its

short-term military capabilities but may weaken its
Chapter .5--Framing the Debate ● 85

Figure 5-1—DTIB Strategic Choices

National International

autonomy interdependence

A A A A A A A

Nuclear Military Major Electronic Ammunition Trucks, Raw

weapons electronics tactical components support materials

weapons equipment

Civil

“Arsenals>> integration

A A A A A A A

Nuclear Ammunition Military Major Electronic Trucks, Raw

weapons electronics tactical components support Materials

weapons equipment

Current Future

capability potential

A A A A A A A

Nuclear Ammunition Electronic Trucks, Military Major Raw

weapons components support electronics tactical materials

equipment weapons

SOURCE: Office of Technology Assessment, 1991.

long-term defense technological potential. Many

people who are concerned about the health of the

DTIB and U.S. international industrial competitiveness favor adopting a‘ ‘Buy American’ strategy that

would concentrate the Nation’s limited future defenseprocurement contracts on U.S. firms. They contend

that foreign-sourcing could erode the DTIB as

domestic firms go out of business, making it more

difficult to shift resources from the civil to the

defense sectors. Moreover, foreign-sourcing could

impair the Nation’s defense capability if foreign

firms are less responsive to U.S. defense needs than

are domestic producers. Proponents of a strategy of

national autonomy argue that procuring most or all

defense materiel from U.S. sources would:

1.

2.

3.

reduce the risk of supply cutoffs during a crisis,

free domestic suppliers of services and equipment from the threat of unfair foreign competition, and

increase the demand for U.S. defense products,

thus potentially increasing U.S. industrial

productivity through larger production runs

and more funding for technology development.

Since most military systems are already purchased

from U.S. prime contractors, this strategy would

have its greatest effect on subtier industries such as

optics, fasteners, bearings, and electronics.3 However, the key national-security consideration is not

3H.R. 4s6, introduced in the l(llst COng., shows one possible pa@ it limited “to domestic manufacturhg and assembly SO~s those exis@ or

new weapons, parts, or components which the President determm. es are critical,” and directed the President to consider “the extent to which domestic

sources for the materials or services being procured can meet defense needs for 6 months following any declaration of war by the Congress. . .“
86 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

total foreign content but foreign vulnerability related

to critical technologies or products.4

The alternative strategic choice would allow

increased interdependence with allies. This strategy

acknowledges both the ongoing globalization of the

technology and industrial base and the increasing

cost of developing new weapons systems. The 1988

Defense Science Board (DSB) summer study on the

DTIB argued that the advent of industrial globalization implied “an interdependence of allied nations

for the technologies and even the components of

defense systems.’ The DSB also noted that

The days of Fortress America are past. We are,

and will remain dependent on foreign resources for

critical components of our weapons systems. We

cannot eliminate foreign dependency in this era of

globalized defense industry. We can and must

eliminate the apparent loss of leadership in key

defense technologies.6

Given the constraints on U.S. defense spending,

the Nation may wish to concentrate on developing

and manufacturing high-performance weapon systems while exploiting foreign sources for some of its

requirements in other areas, such as small arms,

unguided bombs, and artillery rounds.

As production and markets become increasingly

international, tracking foreign content becomes

increasingly difficult and costly. A manufacturer

may use thousands of parts, from bolts to integrated

circuits, from a variety of sources. Although measuring the average foreign content of U.S. weapons is

difficult, most attempts reveal that it is low, almost

certainly less than 10 percent. Final assembly of

end-products for U.S. forces will probably remain

limited to domestic prime contractors. Thus, as

previously noted, the strategic choice between

autonomy and interdependence will have its most

profound effects at the subtier levels.

Proponents of international interdependence contend that it will:

Photo credit: U.S. Department of Defense

The British Harrier jet, capable of vertical takeoff and

1.

2.

3.

landing, is just one example of valuable foreign

technology available from allies.

create a more competitive environment, ultimately decreasing the price of military products;7

facilitate standardization and interoperability

of weapons with allies; and

assure access to the best technologies as new

scientific developments take place-around the

world.

Collaboration with allies has given the United States

such defense technologies as the British Harrier

VTOL (vertical takeoff and landing) fighter and

Chobham composite armor, and the German 120

mm gun for the Ml tank.

The Nation may wish to preserve selected critical

technologies for reasons of national security or

industrial competitiveness. This goal might be

achieved through protectionism or active intervention to make U.S. sources internationally competitive. The challenge for policymakers is to develop a

definition of which technologies are truly critical,

and to establish priorities for promoting them with

limited resources. The three current critical technology lists (table 4-2) have been criticized as too broad

to provide any real guidance.

 Bill Taylor, u.S. IndustrialBase Dependency/Vulnerability (Mobilization Concepts 

1987), pp. 1-15.

 under of Defense for Final Report of the Defense Science Board r Study on the Defense 

and Technology Base (Washington, DC: October 1988), p. 1.

7For DOD cost of man&~ of moo@ from 

for fiscal years 1986 through 1990. Report to the United States Congress by the Secretary of The Restrictions 

Defense Procurement (Washington DC: U.S. Department of Defense, July 1989), p. A-65.
Chapter 5--Framing the Debate . 87

An additional consideration is that future cooperation with allies may be driven in part by the need for

stronger controls on the worldwide proliferation of

weapons and defense industrial capabilities. A

recent OTA report on the international arms trade

examined the dilemma of the United States and its

allies in choosing between arms exports to maintain

a viable defense production base, and export controls to reduce the flow of modem weapons and

technology to potential trouble spots.8 The study

argued that the globalization of the arms industry

and the trends in defense technology suggest that

unilateral action to reduce the proliferation of

modem weapons and technology is bound to fail.9 If

so, then closer defense industrial cooperation with

sophisticated partners such as the European allies

and Japan would provide access to new technologies, while improving allied coordination for controlling the export of sensitive technologies.

Whether such an arms-export control regime

could be effective is unclear, however, since the

United States, Europe, and Japan do not control all

of the important weapons technology. Other countries have both military technology and the incentives to export it: Brazil and the People’s Republic

of China need foreign exchange, while Taiwan and

Israel may need political support. It might also be

exceedingly difficult to rationalize production among

allies on the basis of national specialization. The

Europeans have long argued that the United States

subsidizes its commercial aviation industry through

military programs, and would be unlikely to forfeit

to U.S. industry the development and production of

high-performance aerospace equipment such as

fighter aircraft or cruise missiles.

One benefit of greater defense procurement from

allies is that the United States might be able to

exploit its leverage as the largest defense market to

set better terms for offsets and other trade practices

that currently concern DTIB planners. But any

increased reliance on foreign sources will depend on

congressional actions to repeal many of the current

legislative restrictions on the offshore procurement,

maintenance, and repair of U.S. weapon systems,10

and a change in Congress’ overall approach to

interdependence.

Arsenal System v. Civilian Integration

Chapters 3 and 4 examined the increasing isolation of the DTIB from the civilian industrial base, a

trend that has been blamed for the increasing costs

of weapons systems and the declining productivity

in the defense sector.

11 Indeed, many observers

argue that the current situation is the worst of all

possible worlds: the Nation lacks the control and

protection of a government-owned arsenal system

but does not get the innovation and flexibility

potentially available from private industry. Thus,

some advocate a return to an arsenal system, while

others prescribe a greater integration with the

civilian economy.

Future defense production requirements will be

too limited to support the current system of multiple

competing defense firms. Before World War II and

the subsequent cold war with the Soviet Union, the

United States maintained the DTIB through a system

of government arsenals and close association with a

small number of commercial producers. A modified

“arsenal system, ” composed of a combination of

government-owned facilities and sole-source private

firms, might allow efficient development and manufacturing of military-unique equipment. Such a

strategy would concentrate on establishing and

maintaining a limited number of expert sources of

weapons and equipment and would restrict competition for Department of Defense (DoD) contracts to

those firms and public facilities with recognized

skills. The French defense industry is one example

of an arsenal system, while the current U.S. nuclear

weapons complex is another. The competitive prototyping approach discussed below might be a way to

maintain the beneficial aspects of competition in this

environment.

Proponents of the modified arsenal strategy argue

that it would allow the Nation to:

8u.s. CoWess, M@ Of ‘RXIMIOIO= hsessmen~ Global Arms Trade: Commerce in Advanced Military Technology and Weapons, 0~-ISCa

(W-OXL DC: U.S. Government Printing Offlce, June 1991), pp. 3-31.

mid.

lefior e=ple, tie Byrnes-~flefson ~endment prohibits foreign construction of my vessel for he U.S. NavY.

1lThe Packard Comrnission and two Defense Science Board Studies, 1) OfIlce of the Under Secretary of Defense forkquisition, Use of Commercial

Components in MiZitaryEquipment (Washington DC, January 1987); and2) Office of the Under Secretary of Defe~e for Acquisitio~ Use of C’ommericaZ

Components in Military Equipment (W%shingtom DC, 1989), all noted the trends and argued for increased use of commercial products, changes in

military spee~lcations, and changes in acquisition procedures.
88 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

1. develop and conserve needed expertise that

could then be expanded in a crisis,

2. improve the efficiency of bid and proposal for

contracts, and

3. increase the stability of production.

Implementation of the arsenal strategy would require major changes in current procurement laws

and in the philosophy of weapons acquisition.

Promotion of competition would have to be reexamined but could still be maintained. Congress

would also need to consider different ways of

controlling costs and fostering innovation without

the current “full and open competition,” perhaps

through the “effective competition” approach advocated in some recent studies.12

The alternative choice is to place greater reliance

on integration with the civilian sector, buying

civilian parts off the shelf and using more civilian

technology and procedures. Proponents of increased

reliance on the civilian industrial base argue that it

would:

1.

2.

3.

lower costs of weapon system development

and production,

result in an improved mobilization capability

against a reconstituted major threat, and

make improved technology available to defense in areas where civilian technology now

leads military technology.

Eliminating unnecessary military specifications and - “ g procurement rules could result in lower

costs for parts purchased directly from commercial

suppliers, and might attract many more companies

back into defense work.13 Current military specifications are frequently criticized for being excessively

demanding. Even when the desired performance is

comparable to that of available civilian components,

the specifications are different, precluding the use of

civilian components in defense systems. In some

cases, military requirements are distinct from civilian requirements and may warrant higher levels of

performance, but military specifications often go

further by describing the manufacturing process,

down to the type of solder and flux. These process

specifications tend to isolate military systems from

civilian technology. Cost accounting and auditing

The pinion gears and axles produced by this factory

assembly line go into both commercial and Army trucks,

an example of civil-military integration.

standards also create barriers to the use of civilian

products.

Additional problems with increasing reliance on

the civilian base might include a reduced performance edge of U.S. weapons over those of potential

adversaries, since-depending on export controls—

they might have access to the same technology.

Moreover, commercial parts might not be capable of

performing with high reliability under severe combat conditions. The choice of an arsenal system or

civil integration will also be highly dependent on the

industrial sector in question. As figure 5-1 indicates,

nuclear weapons will always be built in arsenals.

With reduced procurement levels, armored vehicles

et al., op. cit., footnote 1, pp. 49-50.

 business of high for potential 

The CSIS study, et al., op. cit. footnote 1, pp. 71-95, follows the themes of the DSB studies and points out ways to overcome many

of the problems.
Chapter 5--Framing the Debate ● 89

and aircraft might be built in arsenals as well, but

electronic components and a host of other components might be better sourced from the civil sector.

A recent OTA report found that foreign defense

firms are generally more diversified into civilian

markets than are large U.S. defense contractors. The

foreign firm are also more integrated between

civilian and military products. This structure appears

to help these firms weather fluctuations in defense

spending.14

To allow rational choices between the arsenal

system and civil integration, Congress would need

to review current procurement laws and make

changes in those laws dealing with access and

accountability. Current laws mandating free and

open competition preclude the use of arsenals

(including sole-source commercial producers) where

they may be appropriate, and laws dealing with

accountability impede greater use of the civil sector.

While current contracting procedures theoretically

allow use of commercial items and enable contractors to make changes in production processes, they

provide few incentives to make such changes.15 (See

box 5-A.)

Current v. Potential Capability

Another important strategic choice facing the

Nation is the allocation of resources between maintaining current military capability and future military potential. With the perception of a sharply

reduced immediate threat and expected large reductions in the defense procurement budget, the present

allocation of resources is being reexamined. Decisions must be made between active and reserve

forces, between buying ammunition war reserves

and maintaining reserve ammunition production

capacity, between procuring current weapons or

spending on research to develop future weapons, and

ultimately between spending on the military and

other national needs.

While it may be necessary in a fiscally constrained environment to retain only the potential for

manufacturing enough sophisticated platforms, such

as the most advanced aircraft and armored vehicles

needed to fight a major conflict, there is still a

requirement to have sufficient fielded weapons,

including aircraft and tanks, to support theater

warfare contingencies. These deployed weapons

would be a product of the limited peacetime defense

production base discussed earlier. They would be

upgraded with new components as necessary until a

new technological breakthrough or aging of the fleet

prompted modernization.

The approach of maintaining future military

potential in the face of sharply reduced defense

budget is currently termed a “research strategy.”

Such a strategy covers a range of possibilities. In the

simplest terms, it means spending proportionally

more on R&D and less on production. But increasingly radical approaches are also imaginable (see

figure 5-2). Alternative A, shown in the figure,

envisions building a limited number of demonstration models with hard tooling16 on an actual

production line to prove manufacturing concepts

and allow field testing. After limited production, the

line would be shut down. Alternative B calls for the

production of demonstration models with soft tooling, without proceeding to develop an actual production line. Alternatively, prototypes could be built to

prove the feasibility of a new technical concept. For

example, between the World Wars, the U.S. Army

built prototypes of several different tanks and guns

but procured only a few. The designs, however, were

the basis for models produced during World War

II. 17

In alternative C, the most extreme case of a

research strategy, no prototype would be built.

Instead, designers would develop components and

use computer-aided design techniques to test concepts and develop technical data packages that could

14u.s. Cowess, ~lce of ~hnolo~~sessment, GlobalArms Trade: Commerce in AdvancediUilitary Technology and Weapons, op. cit., footnote

8, pp. 69-78.

lsFOre=ple, ~on~~torsaaendyr=o-end production -es @ improveproductivity,but suchr~ommendfio~rnust go thrOU@ ~~

DoD COlllEWl d levels. If accepted, they may not result in any direct return to the contractor, who may lose the contract to another source.

16There is n.s-Ifie ~~=“~’~ ~d “soft” ~o~, but in gene~,~tool~ Wnsists of s~ps ~(1 dies designed to serve for a low

production run of one particular pa while soft tooling is less durable and Specialia and may even be improvised, but is adequate for making only

a few items.

17See, for ~~ple, ~c~d M. ~gorkie~cz, A~r (New York ~:F~erick A. Praeger, 1960); ~d Rep. r-runnicu~ Firepower (Novato, CA:

Presido Press, 1988). Also, a prototype of the M1918 4.7 inch antiaircraft artillery gun that was built after the World War IArmistice, but not put in

inventory, was the basis of the 120 mm AA gun produced in 1943. U.S. Army Air Defense School Air Defense: An Historical Analysz”s, vol. 1 (Fort

Bliss, TX, June 1%5), p. 48.

292-887 0 - 91 - 4 - Q~ 3
90 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

OTA DEFENSE INDUSTRY SURVEY

Box 5-A-Civil-Military Integration

Defense contractors surveyed by OTA contend that civil-military integration should be pursued on a

case-by-case basis. Greater use of commercial technology makes sense in areas such as electronics and aerospace,

where defense and civil requirements are often similar, but not in military-unique fields such as missile propellants

and gun tubes. When the use of commercial technologies is appropriate, many firms believe that such use could

usually provide a particular capability at lower risk and cost, while expanding the mobilization potential of the

civilian industrial base. The surveyed firms also believe that greater use of commercial buying practices would yield

major benefits. For example, while commercial firms use competition to lower costs, they are not afraid to

single-source, often forming long-term partnerships with qualified suppliers to control prices. Commercial films

also use simple purchase-order systems and have sought to minimize requirements for documentation and source

selection.

In general, defense firms have had difficulty breaking into commercial markets because of high overhead costs

and a lack of understanding of commercial business, Defense contractors also note they must make capital

investments in special processes, test equipment, and tooling to meet government requirements that are rarely useful

commercially. Conversely, heavily commercial firms tend to view government business as unpredictable,

low-profit, burdened with onerous regulations, and carrying the potential for loss of proprietary information.

The surveyed defense firms contend that government policies are the primary obstacle to civil-military

integration. Restructuring procurement rules to accomodate commercial practice i8 not an easy task when faced

with the myriad test and certification requirements currently in place. Strict government regulations, payment

policies, auditing, and oversight rules constrain the industry’s ability to perform military and Commercial work in

the same factories. Other institutional obstacles to civil-military integration include overly rigid performance and

manufacturing specifications, which tend to suppress innovation; mandatory Competition; cost-accounting rules and

certification requirements; and set-asides for subcontracts to small and Disadvantaged Business (SDB). While such

set-asides reflect valid social concerns, larger companies argue that they hamper effective and efficient acquisition

and make it difficult to develop and maintain long-term business relationships with suppliers.

According to the surveyed firms, achieving greater civil-military integration will require a complete overhaul

of government acquisition policy. First the Department of Defense must be more willing to tailor its requirements

to what is commercially available. Second, auditing procedures must be changed to permit use of identical parts

and components in military and commercial products produced by the same firm. Third, defense procurement

practices should become more similar to commercial ones. Finally, government should support R&D on dual-use

technologies with both defense and civil applications, and make seed money available through loans or grants for

civil initiatives by defense firms.

Figure 5-2—Alternative Research Strategies

Increased R&D, Limited pro- Product ion of Computerproduction at duction with prototype with aided

low Ievels hard tooling, soft tooling design

lay away Iine

Baseline A I te r n at i ve

res e a rc h

s t rate g y

A A

A Alternative B Alternative C

SOURCE: Office of Technology Assessment, 1991.
subsequently be produced when needed. While this

type of “research strategy” is many years from

being a practical reality, manufacturing technology

is moving in that direction. Computer-aided design,

computer simulation of operational environments, a

design philosophy emphasizing high reliability and

ease of maintenance, and automated flexible manufacturing would all make this type of research

strategy a more practical alternative.

Each of the research strategy alternatives has

certain limitations. Moving along the spectrum from

production to pure research lowers costs but increases risk and uncertainty. For example, skeptics

argue that without actually working out the manufacturing process, it is impossible to foresee all the

roadblocks standing between an idea and the actual

production run. Thus, while building prototypes

could reduce unforeseen problems with systems

integration, building one or two prototypes would

reveal little about serial or large-scale production,

operational use, maintenance, and reliability.

Moreover, the operational potential of many past

weapon systems was not fully appreciated until

enough of them had been deployed to allow military

commanders to experiment with them in field

exercises or on the battlefield. A process that

generates a continuous flow of hypothetical weapons would never allow military commanders to

develop optimal tactics for using them, nor would it

allow the military bureaucracy to assimilate new

weapon systems prior to a major conflict.

With the reduced expectation of future profits

from production, companies will have less incentive

to support research and development. Interviews

with industry representatives frequently reveal the

intention to reduce research spending in response to

current planned cutbacks in procurement, in part
92 ● Redesigning Defense: Planning the Transition to the Future US. Defense Industrial Base

because of the reduced opportunity to recover

independent research and development (IR&D)

expenses. For this reason, the Federal Government

will need to support defense research and development directly, rather than indirectly through production. Such funding could be accomplished by

covering the full cost of private-sector R&D contracted by the government, and by moving critical

capabilities into arsenals or government laboratories

where the technological know-how might be kept

alive in the absence of procurement. Such arsenals

Could be government-owned and operated, or governmentowned but managed by expert firms operating with

sole-source contracts. Whatever the approach, one

key to a successful research strategy is the ability to

separate R&D financing from the expectation of a

profitable production contract.

TACTICAL DECISIONS

Each of the strategies outlined above would be

tailored to meet the varied perspectives of the DTIB

outlined in chapter 3: industrial sector, tier, ownership, and functional area (R&D, production, or

maintenance). The following sections discuss tactical decisions involved in achieving the desirable

characteristics of the future base (outlined earlier in

table 5-2). These decisions will occur within the

context of the broad strategies just discussed and

will also be affected strongly by the four DTIB

perspectives.

Advanced R&D Capability

The advanced R&D capability of the DTIB is

embodied in the dedicated defense base and the

larger civilian base, and is increasingly global in

character. Maintaining this capability in the face of

declining procurement will require:

1. the retention and replacement of skilled R&D

personnel;

2. the identification of core competencies; and

3. the development of new ways to discipline,

guide, and evaluate R&D within a streamlined

defense R&D establishment.

Human Resources

The most important single component of an

advanced R&D capability in the base is people.

Across the board, managers at laboratories, private

firms, and within DoD identified human resources as

the key to the Nation’s defense R&D capability.

They also noted that retaining quality personnel in

the face of the expected budget downturn creates

severe challenges. One immediate problem is that

laying off workers yields quick savings for a firm or

agency struggling for survival, but may endanger its

long-term design and manufacturing capabilities.

Strategies for attracting and retaining good research and development personnel include higher

pay, a challenging work environment, and job

security. Over the longer term, interesting and

challenging work is the most important motivation.

Thus, while downsizing the base, it will be necessary

to maintain meaningful work for defense R&D

personnel, possibly through research grants and

programs not directly tied to production. Moreover,

maintaining a core of personnel dedicated to defense

R&D in the peacetime DTIB is insufficient for

preserving an advanced research capability. The

Nation also requires access to civilian technology

and to the R&D personnel employed in the larger

mobilizable civilian base. For this reason, it will be

necessary to monitor and maintain R&D capabilities

in dual-use areas such as aerospace, electronics, and

advanced materials, all of which are critical to

designing the next generation of military systems.

Appendix B suggests some new approaches to data

collection that might improve the Nation’s understanding of its industrial capabilities.

Facilities are less critical than people, but given

the complex and costly equipment required for

R&D, they are still important. With reduced budgets, many facilities may be closed. The military

Services are consolidating their research laboratories with the intention of creating better overall

capabilities while cutting long-term costs. Yet many

of the consolidation plans require upfront costs that

make them more expensive in the short term. This

funding dilemma is particularly critical with respect

to the Department of Energy laboratories, but it has

also affected the Army’s plan for consolidating its

R&D facilities. If the Nation is to maintain viable

defense R&D capabilities in the future, however, it

will have to pay the upfront costs associated with

such consolidation. Further, some facilities will

have to be closed, and community losses accepted.

Core Competencies

The publication by executive branch agencies of

three different “critical technology lists” over the

past 3 years (outlined in table 4-2) indicates a

growing desire to identify and prioritize technologies for which the Nation must maintain a domestic
Chapter 5-Framing the Debate . 93

Photo credit: Microelectronics Center

A technician manufactures microwave circuit substrates in

a dean room. Attracting and maintaining skilled personnel

are key to preserving a viable defense technology base.

knowledge base in the face of growing resource

constraints and international competition. The general nature of the technologies listed and differences

among the three lists suggest the difficulty of

deciding which technologies are truly critical to the

Nation’s economic health and military security.

Nevertheless, examples of technologies that currently appear to meet every definition of ‘critical”

include electronics, propulsion, advanced materials,

and software. Identifying such core competencies

will assist the United States in adequately funding a

small number of truly vital areas of R&D with

limited resources.

In addition, cutbacks in R&D spending may

require greater specialization in defense technology.

Over the short term, across-the-board cuts in R&D

funding are easiest because they “spread the pain”

and thus are bureaucratically more acceptable. Many

research organizations have found, however, that

since R&D projects often require a minimum level

of support to accomplish anything at all, it is

preferable to cut entire programs rather than to

reduce funding across the board. The Nation may

therefore be forced to concentrate its defense R&D

efforts in those sectors that are both of critical

importance to military systems and not available

elsewhere.

For example, it may be necessary to abandon

defense electronics R&D in those areas where the

civil sector can be depended on to improve performance, such as higher speed and smaller size, and

concentrate on those areas where no civilian R&D is

taking place, such as hardening against nuclear

effects or developing dedicated circuitry for electronic warfare. As a result, the Nation will need to

place greater emphasis on civilian R&D. Similar

arguments hold with respect to foreign-sourced

technology. The Nation may have to focus its R&D

efforts on those technologies deemed to be critical,

while placing greater reliance on allies and international industry in other areas.

A basic question is the degree to which important

defense technologies are maintained in government

facilities or in the private sector. The lion’s share of

defense R&D is currently conducted by private

industry. Service laboratories visited by OTA typically contract out three-quarters of their R&D work

to private firms.18 While the government laboratories want to retain in-house talent, they recognize the

importance of keeping skilled researchers in the

private sector because it is defense contractors that

actually apply technology to weapon systems. Ultimately, however, the biggest cuts in defense R&D

personnel will be made in the private sector.

The globalization of science and technology

makes new discoveries abroad increasingly likely,

either in the laboratories of foreign countries or the

foreign-based subsidiaries of U.S. multinational

corporations. Maintaining cooperative scientific programs with allies assures access to new developments with potential military applications. Nevertheless, excessive dependence on allies is not

desirable. While it would be too costly and practically impossible to stay ahead in all areas of defense

technology, the United States must strive to retain

 half of in-house money is spent on research and half on contract administration.
94 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

world-class competence in critical sectors. International cooperation can promote that competence, but

only if the United States benefits as much from

cooperation as its partners. For this reason, the

Nation must ensure that future international cooperative programs provide for reciprocal flows of

technology, and that mechanisms exist to transfer

dual-use technologies developed through international civilian R&D efforts to U.S. defense applications.

Service laboratories are knowledgeable about

civilian developments in their technical areas. But in

order to take maximurn advantage of the possibilities in this area, DoD should improve its existing

capability for assessing and evaluating international

developments in both civilian and military technology for their potential to fulfill U.S. defense needs.

Guiding and Evaluating R&D

Although the U.S. Government runs some outstanding laboratories, most defense R&D will continue to be in the private sector, with greater

emphasis on single sources. If the government wants

to preserve a robust R&D capability, it will have to

find ways to maintain funding at levels now

considered high relative to the overall defense

budget, to make funding less dependent on production, and to communicate this long-term commitment to industry. One approach might be to transfer

more resources from production to defense R&D.

Although the administration’s 1992 budget proposal

would increase total R&D funding, most of the

increase is in advanced technology development

(6.3A) and engineering development (6.4) of systems slated for production, such as the Advanced

Tactical Fighter and Light Helicopter-that is, a

continuation of past policy. A different approach

would be to mandate fewer weapon development

programs and to insist on greater interservice

commonality, such as a single advanced attack

aircraft for the Navy and the Air Force instead of a

different one for each Service. This approach might

result in longer production runs and hence lower unit

costs. While joint Service procurement efforts do not

have a happy history (note the F-111), there is no

fundamental reason why they should not work.

Related civilian research in dual-use technology

will also be of benefit for defense, although the size

of the payoff will depend on the technology in

question. For example, there may be important

‘‘spin-ens’—transfers of technology from the civilian sector to defense—in areas of microelectronics,

displays, and software production. Nevertheless,

civilian technology has little relevance to important

military technologies such as stealth, many areas of

defense electronics, and nuclear hardening.

Competition in R&D is one means to promote

innovation and impose discipline for greater cost

efficiency. But while competition must continue in

defense R&D, during a period of austere funding it

must be structured differently. Rather than competing laboratories, there might be competing design

teams at the same laboratory. Similarly, in the

private sector, a few lean design teams with associated manufacturing capability-along the lines of

the Lockheed Skunk Works-could be maintained

for each major type of weapon system or technology.

And instead of domestic competition among U.S.

fins, there might be international competition, with

the United States relying on a single domestic source

in competition with other world-class producers.

Since World War II, defense R&D has concentrated on weapon performance rather than manufacturing, reliability, and product maintenance. When

the United States faced a numerically superior and

technically sophisticated enemy, it made sense to

emphasize battlefield performance. With the reduced military threat, however, it is now possible to

trade some of this performance for improved reliability, lower-cost manufacturing, and reduced maintenance. Doing so will require changing the incentive structures to make other design goals as

important as performance in the overall development process.

Design and Prototyping

A key element of the future DTIB will be a

continuous design and prototyping capability that

can operate with reduced R&D spending and in the

face of curtailed production. The extent to which

designs are carried through to manufacture will

depend on whether there is a technological development that provides a significant operational performance advantage. Some prototypes will lead to force

modernization, while others will simply advance the

state of knowledge within the defense technology

base. Figure 5-3 outlines a “dual-track” approach,

with the development and prototyping of new

systems on one track and the development and

prototyping of components for upgrading current

systems on the other. This dual-track approach
Chapter 5-Framing the Debate ● 95

Figure 5-3-Dual-Track Prototyping Strategy

R&D

civil and military

Weapon system

prototyping/technology 4

demonstration 4

Limited

production

Operational {

testing 4

+

No

I

Yes

Yes

I

No

No

Full production

* for force

modernization

Component

prototyping/technology

demonstration

~

No

1 Yes

No

Yes

1

SOURCE: Office of Technology Assessment, 1991.
96 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

would ensure that fielded systems are kept up-todate and would help maintain the skills of both

design and manufacturing teams. The retrofits and

upgrades could also preserve the capability to

produce components and parts, which would be

manufactured either by subtier firms or by prime

contractors. For example, the F-4 Phantom fighter,

the B-52 bomber, and the AIM-9 Sidewinder missile

have all undergone extensive modifications and

upgrades.

Like R&D in general, the capability to design and

develop new systems rests largely with people,

namely the design and engineering teams essential

for the development of modern weapon systems.

These teams vary in size according to the complexity

of the system and the stage of development. For

example, design teams for a modern fighter aircraft

can grow from a half dozen people in the initial

conceptual design phase to a few hundred to a

thousand engineers with a variety of skills during

prototype development and testing. The size of

design teams also varies considerably by firm and

can apparently be kept small without undue harm to

design quality. In fact, there maybe real advantages

to a small team. One of Kelly Johnson’s basic

operating rules for the Lockheed Skunk Works was:

“The number of people having a connection with the

project must be restricted in an almost vicious

manner. Use a small number of good people. . . .’

The idea of maintaining a design and prototyping

capability that is not directly linked to production

has been criticized as impractical partly because

good design teams are unlikely to continue to work

without seeing any tangible results, and partly

because the design process needs an occasional

‘‘reality check. ’ In fact, these are not insurmountable obstacles. Scale prototypes can test technological innovations, keep design teams interested, and

allow them to be ready when new requirements

arise. For example, gas turbine engines, because of

their long development-cycle times, necessarily

have to be improved without regard to specific

eventual applications. Compared to production,

these prototype programs can be relatively inexpensive: the Joint Turbine Engine Advanced Gas

Generator demonstrator cost the government $60

million over 4 years, with additional industry

contributions of $30 million. Further, as figure 5-3

notes, a limited number of prototypes of new

systems would sometimes be built and tested, and if

promising, would be followed by limited production

Photo credit: Lockheed and Corp.

Two industrial teams competed for the Air Force’s

Advanced Tactical Fighter contract. Competitive

prototyping could maintain important design skills,

although not all prototypes would be carried into

production.

of sufficient units to test operational concepts (e.g.,

enough aircraft for a squadron or enough tanks for a

battalion). If the new system provided an operational

advantage, then force modernization could occur. A

good example of this process is the development and

production of the F-117 stealth fighter.

Responsive Production

While the current defense production base exhibits considerable overcapacity with respect to current

peacetime production requirements and is sufficiently responsive to meet most requirements short

of a ‘‘reconstituted’ Soviet threat, that condition is

unlikely to last long. The base is shrinking rapidly

with the closing of production lines for major

systems such as tanks, fighter aircraft, and electronic

systems, and their supporting spare parts (see ch. 4).

The transition strategy must therefore identify the
Chapter 5--Framing the Debate ● 97

critical items of defense equipment that might be

required for future short-notice contingencies and

preserve the manufacturing capacity to meet those

needs.

Since much of the defense production effort is in

subtier firms, maintaining industrial responsiveness

will entail either preserving critical subtier capabilities or allowing vertical integration to occur as

primes bring more subcontracting in-house, possibly

by not requiring the second-sourcing of spare parts

production. The transition to a small responsive base

of the type envisioned will require: 1) identifying

critical areas of defense production, 2) setting

priorities, and 3) funding a surge capacity in the

identified areas.

Identifying Critical Areas

Realistic short-warning threats now appear limited to regional conflicts outside Europe. Under

these conditions, surge production capacity can be

limited to those munitions, spare parts, and consumables that theater commanders view as critical to war

fighting. Some examples of immediate-response

requirements for Operation Desert Shield/Storm are

shown in table 5-3. In addition, there is a need for the

capability to modify fielded systems rapidly as

combat experience reveals operational shortcomings. Much of this responsive element will probably

have to be maintained in a dedicated defense base,

although some products, such as clothing and food,

have sufficient commonality with the civilian production to allow for greater use of the civilian base,

as occurred during Desert Shield/Storm.

The degree of foreign dependence that the Nation

can accept in meeting identified surge requirements

will be a contentious issue, and one that should be

addressed directly. U.S. law cannot compel priority

production of items by foreign manufacturers outside North America. Nevertheless, DoD could hedge

against defense production bottlenecks in a crisis by

stockpiling foreign-sourced parts. Since the responsive base will be devoted primarily to supporting

military equipment already in the field, some degree

of foreign vulnerability maybe unavoidable but can

be minimized by developing multiple foreign suppliers. Limiting the size of the responsive element of

the base will also facilitate establishing DTIB data

requirements, which are essential to base management (see app. B).

Table 5-3-Desert Shield/Storm Immediate

Response Requirements

. Rations

. Chemical suits

● Atropine injectors

. Desert uniforms and boots

. E-3 electronic pods

. Waste disposal units

. 25mm Bushmaster ammunition

. 120mm tank ammunition

. Missile shipping containers

SOURCE: Office of Technology Assessment, 1991.

Setting Priorities

Maintaining a selective surge capability will

require better planning than in the recent past, when

the task of trying to surge all weapon systems was

perceived as unrealistic and thus resulted in little

action or funding. Indeed, the key to having a

responsive base is to determine which items require

a surge capability and to fund that capability.

Industrial preparedness planning requires a coherent

management approach, such as Graduated Mobilization Response (see ch. 3), and must be coordinated

with realistic war reserve stocks to ensure rapid

response in a crisis.

Production lines for selected surge items would be

kept open with low levels of production. Since

peacetime production rates of these items are likely

to be too low to support second-sourcing, the Nation

would have to move toward greater reliance on

single sources with additional surge capacity. When

meeting surge requirements, civilian goods such as

clothing, fasteners and subcomponents, and services

such as maintenance and food service should be used

whenever possible. Thus, preserving a rapidresponse industrial capacity may require substantial

changes in the defense-procurement statutes and

regulations to allow greater use of the commercial

industrial base and sole-sources.

Funding for Surge

Having identified the limited number of items to

be included in the responsive element of the base, the

Nation must fired the capability to surge. This

funding should be considered as essential to national

security as funding for troop exercises or any other

training or contingency planning. Surge simulations

and exercises will also be necessary.
98 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Photo credit: U.S. Department of Defense

Prepositioned equipment for a U.S. division lies in storage in Europe. The new security environment will require

a reappraisal of war reserve requirements.

Mobilizable Production Base

While the responsive portion of the DTIB enables

the Nation to cope with- less challenging but more

likely theater-level contingencies, producing military equipment in peacetime at affordable prices

requires access to a larger industrial base--part

dedicated to defense production and part remaining

in the civil sector. This mobilizable component of

the production base also provides a hedge against a

reconstituted Soviet threat or any other great-power

threat that could arise over a period of years. It

comprises defense contractors whose products—

tanks, ships, and fighter aircraft-would not be

surged in lesser contingencies, civilian factories and

workers that could be transferred to defense production, and some foreign suppliers. Since rapid responsiveness is not a requirement, the defense plants in the

mobilizable component of the base should be sized

for small, realistic production runs to support the

peacetime modernization of forces (see box 5-B). In

addition, reliance on a mobilizable civilian base

implies the maintenance of a robust civilian manufacturing sector in electronics, machine tools, and

heavy vehicles that is capable of converting to

defense production in an emergency.

Recent developments in manufacturing technology have led to much interest in the so-called

“factory of the future.” This concept envisions a

manufacturing process that:

1.

2.

3.

4.

surveys customer needs,

evaluates alternative designs for meeting those

needs,

selects the best design with respect to ease of

manufacturing and product reliability, and

manufactures and delivers the product.
Chapter 5-Framing the Debate ● 99

Box 5-B—How Production Planning Affects Costs

Discussions of downsizing the defense industrial base often focus on maintaining critical manufacturing

capabilities. The worry is that as production levels of weapons decline, unit costs will go up, and that there maybe

some minimum volume at which production will cease to be economically viable. What, in fact, is the relationship

between unit cost and levels of production?

Industrial production can be characterized by the number of items built. The extreme is one-of-a-kind

production, such as the Hubble Space Telescope or the Eiffel Tower. The opposite extreme is mass production of

millions of identical items, such as light bulbs or memory chips. Between these two extremes lies “serial”

production of limited numbers of similar items. Although artillery rounds and small arms ammunition are

mass-produced, most modem weapon systems are serially produced. Indeed, even ‘‘large’ production runs of

defense systems are modest by the standards of most industries. Armored vehicles are bought by the thousands,

fighter aircraft by the hundreds, and small warships by the dozen. Nor are production rates high. For example, in

1989, the United States procured on a monthly basis one F-14 fighter, two Harriers, three F-15s, seven F-18s, and

fifteen F-16s. Thus, cutting the total number in half does not entail changing from mass production to serial

production, but rather from serial production to smaller serial production.

Manufacturers generally like large production runs because unit costs tend to decline overtime. As more items

are built, workers learn new skills, management improves, and early mistakes are avoided, resulting in a‘ ‘learning

curve” of increasingly efficient production. Learning curves are measured in terms of a “progress ratio,” or the

ratio of the cost of the second lot of items to the cost of a first lot of equal size. For a wide range of products, from

electronics to aircraft, the progress ratio is roughly 80 percent, with almost all cases falling between 70 and 90

percent. Moreover, studies have shown that the variation in progress ratios is greater between firms in a single

industry than between two different industries. This observation suggests that company organization and

management are key to efficient production.1

In addition to learning, other effects reduce unit costs in large production runs. Some “fixed” costs, such as

research and development or initial tooling, are independent of the size of the eventual production run. As these costs

are spread over more units, a smaller share is allocated to each item, lowering average unit costs. The converse is

also true: if fewer items are produced, unit costs will rise. Finally, as more units are produced and markets become

larger, commercial firms often make capital investments to increase production efficiency. Yet this strategy entails

the risk that if the expected rise in demand does not materialize, unit costs will increase.

In addition to the total number of units produced, unit costs are affected by the planned rate of production. On

the one hand, if an expensive piece of manufacturing equipment must be purchased, it is generally cheaper to

manufacture items with one machine rather than with two machines operating in parallel at twice the rate. On the

other hand, a short production run with a rapid return on investment will minimize the cost of borrowing money

for the initial research and development, equipment, and training. Given any set of conditions, one can calculate

an optimal rate of production to minimize unit costs.

Once manufacturing facilities have been built, however, deviations from the planned rate of production will

increase unit costs. If production drops below the planned rate, overhead costs must be spread over fewer units.

Conversely, if production rises above the planned rate, unit costs will rise because of the need for multiple shifts,

overtime, and delayed equipment maintenance. In sum, there are three separate but related production factors that

affect unit costs:

1. total numbers produced,

2. planned production rate, and

3. deviations from the planned production rate.

While defense-industrial analysts have expressed concern that smaller production runs will greatly increase

unit costs, deviations from planned production rates are at least as important. As a result, the increased costs of

smaller production runs can beat least partly offset by more realistic planned production rates and more predictable

funding.

IL~ mote ~d wtis Epple, “ac~es in ~ufaeturing,” Science, vol. 247, No. 4945, Feb. 23, 1990, Pp. 92@924.
While totally integrated future factories will make

extensive use of automation and computer-aided

design and manufacturing, the concept relies less on

computers and robots than on a new philosophical

approach that emphasizes flexibility in meeting a

wide variety of customer demands. Greater flexibility in manufacturing would allow for more integration of civilian and defense production. For example, it may eventually become possible to exploit the

inherent flexibility of ‘dual-use’ factories to manufacture military components that have no direct

civilian counterparts. With the help of a small cadre

of personnel in the dedicated defense base, dual-use

factories would be capable of shifting from civil

production to the manufacture of weapons in an

emergency. Nevertheless, such truly flexible manufacturing systems remain distant.

To harness the Nation’s total industrial strength

against a reconstituted threat and to exploit future

flexible manufacturing, weapons design might be

determined more by commercially available technologies than by the desire to optimize military

performance. Moreover, since the mobilizable component of the defense base is embedded in the larger

civilian base, the strategy for transition to the future

DTIB will be shaped by concerns over the declining

international competitiveness of the U.S. civilian

industrial base.19 Many of the steps necessary to

strengthen this broader base are outside the purview

of the Department of Defense and the other nationalsecurity agencies of the Federal Government. If DoD

is to make more effective use of the civilian

industrial base, however, it will require better data

about the commercial availability of dual-use products so it can define those industrial sectors in which

civilian and defense production can be integrated

most effectively.

Also essential is a major review of the defense

acquisition laws to identify changes that can promote greater integration of the civilian and defense

industrial bases .20 Laws that warrant review include

those that mandate government auditing and ac-

 DOD by of Defense for Acquisition, Bolstering Defense 

 DC: Department of Defense, July 1988), and several Defense Science Board studies. Civilian studies of the issue include: Office of

 Assessment, Things Better: Competing in Manufacturing (Washington, DC: U.S. Government Printing March 1990), and

the report by the MIT Commission on Industrial Productivity, Made in America (Cambridge, MA: MIT Press, 1989).

et al. op. cit., footnote 1.
Chapter 5--Framing the Debate ● 101

counting procedures, and give the government rights

to technical data, particularly in the case of subtier

firms whose survival depends on specialized dualuse technology.

Maintaining the ability to make national security

use of the mobilizable production base will not

necessarily entail more government intervention,

but it will require planning and better tracking of the

changing capabilities of the base. The United States

will need to invest in establishing and updating

databases that monitor the Nation’s industrial resources, and the Departments of Defense and

Commerce should assign more staff to follow

defense-industrial issues. This data-gathering effort

must be comprehensive while avoiding excessive

intrusion into proprietary areas. In those cases where

DoD considers it essential to maintain a domestic

capability to manufacture particular defense items,

the government may have to invest in creating or

maintaining a U.S. source; in less critical cases, the

decision may be made to source abroad. It is likely

that the mobilizable production base will place

greater reliance on interdependence with allies than

the responsive base.

Maintenance and Overhaul

As noted earlier, the maintenance and overhaul

component of the base will likely be confronted with

limited requirements in the near term (5 to 10 years)

and increasing requirements after that period as

systems are retained in inventory. The size of the

increase will also depend on the effort devoted to

designing improved maintainability into new systems. Investing in this area could keep maintenance

requirements low by historic standards.

An important question facing defense-base planners for the transition period is whether maintenance

should be performed by Service depots or by the

private sector. Traditionally, maintenance and overhaul have been a responsibility of the military

Services, but a growing number of manufacturing

fins, faced with the prospect of fewer production

contracts, are becoming interested in maintenance,

remanufacture, and retrofit work. At the same time,

Service depot consolidation is either planned or

taking place. The military Services argue that

in-house maintenance facilities provide greater flexibility and responsiveness in supporting overall force

readiness. Further, the Services are wary of overreliance on private firms that have shown little

interest in maintenance and repair work until the

recent budget decline, and may not wish to stay in

the business when economic conditions improve.

While the Services argue that there is a need for

an in-service depot capability and that some minimum core of business is also essential for maintaining competency, they appear willing to compete

with private industry for work above this minimum.

Maintenance, overhaul, and upgrade contracts might

be critical to maintaining a private-sector design and

production capability for some weapon systems,

such as armored vehicles. Nevertheless, Congress

may wish to pay particular attention to maintenance

during the transition so that government capabilities

are not lost because of promises by private firms that

never materialize.

Good, Integrated Management

Despite the volumes of recommendations for

improving the management of the DTIB and the

numerous management reorganizations that have

taken place over the last decade, few people argue

that the current base is well managed. Many of the

problems identified in the current DTIB result from

national rather than Department of Defense actions.

For example, the inability to make long-term manufacturing plans is critically affected by unpredictability in program funding, which has often fluctuated

independent of changes in the threat. One way of

addressing this problem is the proposal for a

multiyear defense budget, which has so far failed to

be adopted by Congress.

One of the most important current issues is the

extent to which the government should intervene to

manage the transition to the future DTIB. As noted

in chapter 3, this is a controversial issue, but one that

must be resolved if the Nation is to move successfully to the new base. Several defense procurement

laws and regulations were developed over the past

decade, a period of rapidly increasing defense

budgets, to provide wide access to government funds

through mandated competition and to ensure accountability in the use of those funds through

extensive auditing procedures. Many of these statutes now appear inappropriate for dealing with the

transition to a downsized DTIB, regardless of which

structure ultimately is chosen.

For example, Congress will want to consider the

negative effects of the Competition in Contracting

Act as currently implemented (see ch. 4). Both DoD
102 . Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

and Congress should also review many of the legally

mandated contracting procedures that make it unnecessarily costly and difficult for firms to bid on

defense contracts. Revised versions of these statutes

might place less emphasis on access and competition, and more on efficiency and quality of procurement and the preservation of core competencies and

long lead-time capabilities. Some reviews of the

defense acquisition regulations are already under

way.

Management of the DTIB will depend on skilled

and experienced personnel. These skills are often

lacking in the current system because of short tenure

and inexperience on the part of many political

appointees, uniformed military, and congressional

staff. The military services have recently made

changes to professionalize their acquisition corps.

Alternatively, some defense analysts have recommended the creation of a professional civilian

acquisition corps similar to those in France, Germany, and other European countries. Although this

approach offers some advantages, the French experience in the Gulf War revealed its limitations. In

particular, French procurement has often been driven

more by industrial interests, such as arms exports,

than by the military requirements of the French

armed forces.

Management of the future DTIB would also

benefit from revamping the complex organizational

structure of the Federal procurement bureaucracy, as

well as improving the relationship between government and business. The latter objective would be

promoted by removing some of the criminal sanctions from the procurement laws. Above all, the

Nation should develop a broad defense technology

and industrial strategy. While the individual services

have developed technology strategies and DoD has

prepared an initial “critical technologies” plan,

there is a need for a comprehensive approach that

better links procurement and defense-industrial policies with operational military plans and overall

national security strategy.

SUMMARY

This chapter has laid out some desirable characteristics of the future DTIB and has discussed the

potential benefits and risks associated with the broad

strategic choices and tactical decisions necessary to

achieve those characteristics. The identified characteristics and strategies were developed on the basis

of discussions with government officials, defense

industry personnel, and other interested observers,

and provide a framework for congressional debate

over the nature of the future DTIB.

The present transition period will be critical to the

health of the future base. Without careful planning,

the Nation could retain the wrong capabilities (old

ammunition plants with little future utility, firms

without weapons-development capabilities) because

of a failure to understand the revolutionary changes

in the security environment or an inability to make

hard choices that might result in facilities being

closed in particular areas.

The Nation has a rare opportunity to revamp the

DTIB that will support U.S. national security well

into the 21st century. OTA’s analysis suggests that

the transition will entail an emphasis on research and

development rather than production, but a broadened approach to R&D that includes improvements

in manufacturing or ‘‘process’ technologies as an

important goal. The future DTIB will also require

continuous prototyping and limited production to

maintain competition while preserving and improving manufacturing skills, and it must be more fully

integrated with the civil sector. Regardless of the

final characteristics chosen and the strategies followed, the emphasis must not be on maintaining the

structures and facilities of the past, but on developing an efficient and flexible DTIB that can meet the

security demands of an uncertain future.
Appendixes
Appendix A

The North American Defense Industrial Base:

Canadian and Mexican Contributions

Introduction

Since the beginning of World War II, Canada and the

United States have engaged in extensive defense industrial cooperation that has resulted in the partial integration

of their defense bases. With sharp cuts in defense

spending in both countries, however, this partnership

faces major challenges. Will the two countries intensify

their collaboration or turn instead to greater protectionism? In planning for the future U.S. defense technology

and industrial base (DTIB), Congress will want to

consider Canada’s contribution to U.S. defense procurement and wartime preparedness, as well as the political

and economic consequences of various policy options

affecting the Canadian portion of the base. There is also

a need to consider the implications for the DTIB of

growing U.S. economic integration with Mexico, including the production and assembly of defense products and

the potential relocation of some subtier industries across

the border.

The concept of a North American Defense Industrial

Base (NADIB) was never a clear U.S. policy objective but

has evolved on an ad-hoc basis over the past four decades.

In the early 1960s, Canada agreed to buy its major weapon

systems from the United States if three conditions were

met:

1. the absence of a domestic production capability for

the system in question,

2. a price that was “not prohibitive,” and

3. tariff-free access by Canadian component suppliers

and subcontractors to the U.S. defense market.

Since then, U.S.-Canadian defense industrial collaboration has developed according to guidelines laid down in

numerous agreements negotiated by the two governments

as specific needs arose. Collectively known as the

Defense Development and Defense Production Sharing

Arrangements (DD/DPSA), these accords have created a

degree of interdependence between the U.S. and Canadian

defense industries. In 1990, direct sales of Canadian

defense goods to the U.S. Department of Defense were

nearly Can$450 million, while subcontracting by Canadian firms to U.S. prime contractors rounded out the total

to about Can$l billion.l

Over the past decade, U.S. defense contractors have

also begun to perform production and assembly work in

Mexico, taking advantage of the special customs arrangements established under the Mexican Government’s

maquiladora (assembly plant) program to benefit from

the low labor costs available across the border. As the

United States, Canada, and Mexico move toward the

creation of a continental free-trade zone, trade in dual-use

and defense products among the three countries is likely

to increase. In that context, a North American industrial

base, and an associated expanded NADIB, may ultimately

emerge.

At present, however, the NADIB is still far from being

fully integrated. U.S.-Canada defense trade has long been

constrained by protectionist legislation in both countries,

as well as by the small size of Canada’s defense industry.

Moreover, the prospect of significant cuts in U.S. defense

spending and declining arms sales to Western Europe may

increase domestic pressures to protect the U.S. defense

market, injecting new tensions into the U.S.-Canada

relationship.

This appendix surveys the structure of the Canadian

defense industry and its contribution to the NADIB, the

history of U.S. defense-industrial cooperation with Canada, the developing partnership with Mexico, and the

effect on these relationships of shrinking defense budgets

and markets. The appendix concludes with a discussion of

whether expanded defense-industrial cooperation with

Canada and Mexico could help the United States maintain

a downsized yet cost-effective defense technology and

industrial base.

The Canadian Defense Industry

The Canadian defense industrial base is much smaller

and more fragmented than that of the United States, and

is also more diversified into the civilian sector. The

Canadian aerospace industry, for example, depends on

defense business for only 30 percent of its revenue,

compared to more than 60 percent for similar industries

in Japan, Europe, and the United States.2

Since the early 1960s, Canada has pursued a strategy of

purchasing almost all of its major platforms and weapon

systems from foreign sources (mainly the United States3

)

IDa@ provided by Canadian fibassy, wm~gton,DC.

zDavid H@~, C’Canadian krosp~e Industry Prepares for Rising Competition, Falling Defmse Sales,” Aviation Week & Space Technology, vol.

134, No. 11, Mar. 18, 1991, p. 68.

3~ 1987, C~@q~C~lo7 bi~onindefeme ~tiprnentfror.n the United States, or77 pereentOf the total -2.2 bfl~ondefe~p~ment

budget. Source: Max Rei& Counselor for Defence Progrsms, Canadian Embassy, Washington DC.

–l05–
106 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

while developing and manufacturing high-quality defense

subsystems and components in selected areas where

Canada possesses technological strengths. Within the

context of this acquisition strategy, the Canadian Government has sought to secure domestic or multiple foreign

sources for “critical” items of defense equipment and to

maintain a defense-industrial base capable of producing

the consumables of war(e.g., ammunition and spare parts)

and repairing and overhauling foreign-sourced weapons.

The Canadian defense industry employs between

80,000 and 90,000 people. Although the industry accounts for less than 1 percent of Canada’s total GNP,

employment, and exports, it dominates a few industrial

sectors. More than 65 percent of employment in shipbuilding, for example, is tied to defense contracts.4 Since

the Canadian defense procurement budget is small (about

US$2.2 billion in 1990), the industry relies heavily on

export markets. In 1988, 30 percent of sales in the

aerospace and defense electronics fields were domestic,

49 percent were to the United States, and 21 percent to the

rest of the world.5

Of roughly 1,000 potential suppliers of defense products, about 250 firms are active producers, all of them in

the private sector. Only a few are large corporations with

annual sales of more than $100 million; most are

relatively small suppliers or subcontractors employing

between 25 and 50 people. Like Canadian industry

generally, the defense industry is concentrated geographically: the large majority of electronics and aerospace

firms are located in the provinces of Ontario and Quebec,

and shipbuilding is based primarily in the Atlantic region.

The secession of Quebec from the rest of Canada might

have a serious effect on the Canadian defense industrial

base if Quebec insisted on full sovereignty, which is only

a remote possibility. Even so, the aerospace industry is

unlikely to leave Quebec, and the industrial ties developed over 50 years between Quebec and the United States

would continue.

Canada produces only a few stand-alone defense

systems, including remotely piloted vehicles, the Swissdesigned Light Armored Vehicle (LAV), and the Canadian Patrol Frigate. Most Canadian defense companies are

specialized in the production of electronic subsystems,

munitions, and precision-machined parts and components

(e.g., aircraft wing assemblies) for export to U.S. and

European prime contractors. Aerospace equipment and

electronics account for 70 percent of total defense sales,

followed by shipbuilding, wheeled armored vehicles, and

munitions. Areas in which the Canadian defense industry

Photo Surveillance Systems 

The CL-227 Sentinel unmanned airborne surveillance

system, manufactured by Canadair in Montreal,

performs battlefield reconnaissance under remote control.

It has a top speed of 130 knots, and an endurance of

up to 4 hours.

is on the technological leading edge include small

gas-turbine engines, reconnaissance drones, avionics,

flight simulators, structural components for aircraft,

military communications equipment, acoustic antisubmarine warfare systems, remote sensing, ballistic computers

and fire-control systems, and equipment suitable for use

under Arctic conditions. (Table A-1 lists the U.S. defense

contracts awarded to the Canadian industry from 1987 to

1989.)

Leading Canadian-owned defense contractors include

Spar Aerospace (developer of the Space Shuttle robot

arm), CAE-Link (a leader in simulation technology), and

Indal Technologies (which produces shipboard helicopter

recovery systems). Nevertheless, many of the largest

Canadian defense contractors are foreign-owned. About

54 percent of the industry is in U.S. hands, while another

10 percent is European-owned, primarily by British

corporations. 6 Seven of the top 10 Canadian firms (by

sales) in the aerospace and defense electronics sectors are

U.S.-owned, including Boeing’s De Havilland Division,

McDonnell Douglas Canada, Litton Systems Canada,

RCA Canada, Raytheon Canada, Garrett Canada, and

Pratt & Whitney Canada. These subsidiaries enjoy

varying degrees of autonomy from their U.S. parents. For

example, Pratt & Whitney, with 9,500 employees, is the

largest aerospace concern in Canada; it has an all-

 Europe: Concerns and Empirical Evidence, 

Resources Solicited Research Canada: National College, fall 1990), p. 18.

 of Integration on Canadian-American Industrial 

in Resources Solicited Research Report ##5 National College, fall 1990), p. 2.
Appendix A--The North American Defense Industrial Base: Canadian and Mexican Contributions . 107

Table A-1—U.S. Defense Contracts Awarded to Canadian Companies, 1987-1989 (millions of Canadian dollars)

Company Year Contractor Value Product

Canadian Marconi 1987

Canadian Marconi

Canadian Marconi

Hermes

Menasco

Indal Technologies

Garrett

Leigh instruments

Adanac 1988

Adanac

Canadian Marconi

CAE-Link

Northern Telecom

Hermes

Astra Pyrotechnics

Spar Aerospace

Hawker Siddley

Canadian International 1989

Computing Devices

Computing Devices

Canadian Marconi

Canadian Marconi

Canadian Marconi

Canadian Marconi

Dowty

Donlee Precision

Litton Systems

Oerlikon

Heroux

Bristol

. . - . . - .- us. Air Force

U.S. Air Force

U.S. Army

U.S. Navy

McDonnell Douglas

U.S. Navy

U.S. Air Force/Canada

U.S./Spain/Canada

U.S. Navy

U.S. Navy

Sikorsky

U.S. Army

U.S. Air Force

U.S. Navy

U.S. Dept. of Defense

U.S. Navy

Textron-Lycanning

U.S. Dept. Defense

U.S. Navy

U.S. Navy

Lockheed

Lockheed

U.S. Army

U.S. Air Force

U.S. Lockheed

U.S. Navy

Kerry Electronics

U.S. Army

U.S. Air Force

U.S. Air Force

:A3

NA

11.0

2.7

10.0

4.0

9.4(est)

9.0

12.0

9.0

60.O(est)

147.0

10.0

1.6

NA

6.1 (est)

2.4

NA

NA

3.2

3.2

58.0

1.2

200.0

1.5

1.0

NA

2.5

4.6

Demonstration: Microwave Landing System Avionics

Airborne Microwave Landing System Receiver

CMA-2016 Helicopter Flight Computer System

AN/SSQ-53B Sonobuoy

C-1 7 Nosewheel and Steering System

Shipboard Helicopter Recovery System (RAST)

Study of Next Gen. Environmental Control System

Recording/Radio Communication Systems for F-18

Program Management System--Antisubmarine Warfare

Shipboard Helicopter Recovery System (BEAR TRAPS)

Helicopter Cockpit Display Systems

Blackhawk/Chinook Helicopter Simulator

Integrated Digital Telecommunications Systems

AN/SSQ-62B Sonobuoys

Signal Cartridges

AN-SAR-8 Shipboard lnfra-Red System

ALF502R Jet Pipes and TF40 Engines

DEW Line Transmission Systems

Antisubmarine Warfare Interface Convertor Units

Unmanned Air Vehicles (with Teledyne Corp.)

Next-Generation U.S. Navy Microwave Landing System

Microwave Landing System for P-7A

AN/GRC-226(V) Radio Sets

Airborne Navigational Equipment

P-7A Landing Gear

Jet Turbine Shafts

LED Switches-Boeing Military Aircraft

Air Defense and Anti-Tank System (ADATS)

Landing Gear for CSA/B, C-130, KC-135R

F-5 Horizontal Stabilizers

NA = Not available

SOURCE: James Fergusson, Canadian Defense Trade and Europe: Methodological Concerns and Empiricxd I%dence, Center for Studies in Defense

Resources Management, Solicited Research Report #4 (Kingston, Canada: National Defenee College, fall 1990), table Viii.

Canadian board of directors and behaves more like a

Canadian firm than a foreign subsidiary.

Canada’s current defense industrial base has both

strengths and weaknesses. Its strengths include a relatively new industrial plant compared with those of other

Western countries, close proximity to the United States,

a relatively secure location (compared to Europe), a local

supply of strategic raw materials, and access to foreign

technology through U.S. and European ownership. The

small size of the base also makes it relatively manageable

from the standpoint of the Canadian Government, although the base has been shaped by its dependence on

foreign military and technological requirements.7 Weaknesses of the Canadian base include the small size of the

domestic defense market, overconcentration in certain

market niches, and the Canadian Government’s modest

support for defense R&D, which could render the

industry’s niche markets vulnerable to foreign competition.8

During the early 1980s, the Canadian Government

invested considerable resources in rebuilding or expanding key elements of the domestic defense industrial base,

with the goal of restoring a selective capability for the

design and production of weapon systems. The Canadian

Government also invested in the defense industry to

promote high-technology innovation, regional industrial

development, and skilled employment. This revitalized

defense base includes naval shipbuilding and naval

electronics subsystems for the Canadian Patrol Frigate

program; the integration of production facilities for

military trucks, utility vehicles, and light armored vehicles; the capability to manufacture small arms such as the

M-16; the phased development of a light to medium

helicopter industry; continued expansion of the design

~.B. Byers et al., Canada and Defence Industrial Preparedness: Options and Prospects (North York Ontario: York University Centre for

International and Strategic Studies, April 1987), p. 120.

@IIly abut 5 ~ment of tie US$2.2 billion (7anadian defense budget is devoted to R&D. In 1989, the Canadian defense industry invested US$637

million in R&D, as well as US$449 million in plant and equipment. Source: David Hughes, “Canadisn Aerospace Industry Prepares for Rising

Competition” op. cit,, footnote 2, p. 68.
108 . Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

and production of small gas-turbine engines; and a

significant improvement in ability of the defense industry

to undertake large-scale integration projects.9

Nevertheless, the plummeting domestic defense requirements caused by the end of the cold war, combined

with softening export markets, have raised concerns that

the Canadian Government’s substantial investment in the

defense industry may be wasted. Few new programs are

being launched to replace ongoing weapons programs,

and many Canadian defense contractors are already

increasing their share of nondefense work. The aerospace

industry is expected to reduce the military portion of its

sales from 30 to 20 percent of the total. 10 As defense firms

turn increasingly to the civil sector, Canada is losing

critical elements of its defense industrial base. For

example, Canadian Marconi Co. (CMC) recently closed

its manufacturing facility in Montreal for militarystandard printed circuit boards, eliminating Canada’s

only domestic source of these vital components.ll

The U.S.-Canada Relationship

With the exception of the late 1970s, when Canada

acquired the German Leopard I tank, defense trade with

the United States has dwarfed that with any other country.

In 1989, for example, the United States accounted for 84.7

percent of Canadian defense imports and 80 percent of

Canadian defense exports. 12 Canada is also a major

supplier of strategic raw materials used in U.S. defense

production: of the 35 critical materials not available

domestically, Canada provides 23. Finally, the Canadian

defense industrial base is heavily integrated into the U.S.

base at the subtier level. Thus, according to Canadian

analyst David Leyton-Brown: “Without access to the

U.S. market, it seems fair to say that there would not be

a Canadian defence industry. ’13 Although the volume of

Canadian participation in U.S. defense contracts is

relatively modest, amounting to about US$800 million in

1990, or only 0.5 percent of the total Department of

Defense (DoD) procurement budget, this figure does not

include the large volume of cross-border trade in dual-use

components.

U.S.-Canada defense cooperation began during World

War II, when Canadian industry manufactured large

quantities of warships, guns, and aircraft.14 The two

governments pooled their industrial resources to reduce

duplication and enhance the effectiveness of the allied war

effort. In 1940, Prime Minister Mackenzie King and

President Franklin Roosevelt met at Ogdensburg, NY,

and signed an agreement establishing a senior advisory

group on North American security called the Permanent

Joint Board on Defense. The following year, the two

leaders issued the Hyde Park Declaration, which directed

each country to buy military goods from the other on the

basis of complementarily, competitive advantage, and

specialization. During World War II alone, the U.S. and

Canada procured from each other equipment worth a total

of $8.65 billion (in 1990 U.S. dollars).

With post-war demobilization, the Canadian defense

industrial base began to erode. Although defense production expanded briefly during the Korean War, NATO’s

short-war nuclear strategy had little need for defense

industrial mobilization. A further watershed in Canadian

defense-industrial policy came in 1959, when the Canadian Government canceled the production of an advanced

all-weather interceptor called the AVROArrow. The most

ambitious defense R&D effort in Canadian history, the

program succumbed to cost overruns, numerous design

changes, the excessive technical demands of the Royal

Canadian Air Force, the lack of export potential, and poor

government planning. 15 Because of the small size Of the

domestic defense market, the Canadian Government

concluded that it could no longer afford to develop

advanced weapon systems and platforms unless it became

a major arms exporter, which would have conflicted with

its foreign-policy goals.

Canadian defense officials responded to this situation

by offering to purchase most major weapon systems from

the United States, in return for duty-free access to the U.S.

market for Canadian producers of defense-related parts,

components, and subsystems. Washington also granted

Canadian subcontractors the opportunity to compete for

U.S. defense contracts on the same basis as American

firms.16 This quid pro quo was implemented through a

series of negotiated memoranda of understanding and

%.d.Gen. A.J.G.D. de Chastelai.q “The Need for Sustainment” Canadian Dejence Quarterly, June 1989, p. 19.

l~avid Hughes, op. cit., footnote 2, p. 68.

ll~~smiv~ At ~co~.: ca~~dus~ IS ~pidly Res~ping Itself TO Combat Declining Defence Markets,” Jane’s Defense weekly, Oct. 20s

1990, p. 775.

lzDam ~ompfl~ by tie c~~@~ent of Exte~ Aff~s. SW Fergusson, op. cit., footnote 4, @les ~ad ~.

13~fion.BmW C)p. Cit., fOO~Ote 5, pp. 2-3.

ldD~gWorld WUH, c-dimind~sqpr~uc~ over 17,~ ficr~t, 38,()(XIW~d~ored vehicles, over 8~,~ wheeled vehicles, ~d 480

naval ships, although it relied heavily on the United States and Great Britain for technical data packages and key subsystems such as aircraft engines.

See de Chastela@ op. cit., footnote 9, p. 15.

15~~~eCmdimDefenW Industrial Base: The Policy Envhonment,” CanadianDefenceIndustry Guide 1990/91 (’1’oronto: BaxterPublishing, 1990),

p. 6.

16will~ Jo~toq “Cmdi~ Defence Industrial Policy and Practice: A Hktory,” Canadian Defence Quarterly, June 1989, p. 25.
Appendix A-The North American Defense Industrial Base: Canadian and Mexican Contributions ● 109

letters of agreement that came to be known collectively as

the Defense Production Sharing Arrangements (DPSA).

The accords had the effect of exempting Canadian defense

products from U.S. Buy American tariffs, as well as U.S.

duties on Canadian defense goods produced under

subcontracts for U.S. prime contractors.

The DPSA agreements laid out five fundamental

objectives for U.S.-Canada defense-industrial cooperation:

1.

2.

3.

4.

5.

greater integration of military production between

the two countries,

improved standardization of military equipment,

wider dispersal of production facilities,

establishment of supplemental sources of supply for

wartime mobilization, and

a greater flow of defense supplies and equipment

between the two countries.17

A June 1963 supplement to the DPSA also called for the

maintenance, over the long term, of a‘ ‘rough balance” in

reciprocal defense procurement at increasing levels.18

The two governments recognized that for the productionsharing arrangement to remain viable, the Canadian

defense industry would need to retain an indigenous

development capability. For this reason, the DPSA was

supplemented by the Defense Development Sharing

Arrangement (DDSA). This agreement provides for the

use of Canadian-developed technology where it can meet

U.S. defense requirements; in such cases, both countries

share in funding the development work, with the United

States contributing not less than 25 percent of the cost of

an R&D project. An example of a successful DDSA

project is the AN/GRC-103 tactical radio, developed by

Canadian Marconi, which is now standard equipment in

the U.S. and Canadian armed forces.

The DD/DPSA accords continue to provide the framework for peacetime defense-industrial cooperation between the U.S. and Canadian defense establishments. This

relationship is managed by a bilateral Steering Committee

that meets on an annual basis and is co-chaired by the U.S.

Deputy Under Secretary of Defense for International

Programs and the Canadian Assistant Deputy Foreign

Minister for International Trade and Development. The

Steering Committee is supported by several subcommittees and working groups. Unfortunately, the large number

of participating agencies from both governments has

often made it difficult for the Steering Committee to

develop clear directives and guidelines.

Types of Defense Trade

There are two types of U.S.-Canada defense trade:

1) government-mediated contracts issued to Canadian

Photo GM Canada

The Light Armored Vehicle (L./W), manufactured by

General Motors Canada, was procured as a nondevelopmental item by the U.S. Marine Corps and used

in Kuwait. The Marines have bought five versions; the

antitank version is shown here.

industry by the U.S. Department of Defense (DoD), and

2) commercial subcontracts negotiated directly between

U.S. and Canadian firms.

The first category involves bids by Canadian companies on contract tenders from DoD. In order to facilitate

participation by Canadian firms in U.S. defense contracts,

the Canadian Government established an entity called the

Canadian Commercial Corp. (CCC), which acts as a

conduit for contracts between Canadian defense contractors and DoD. The CCC obtains Requests for Proposal

from the Ottawa office of the Defense Contract Administration (part of the U.S. Defense Logistics Agency). The

CCC then solicits bids from Canadian contractors and

submits them to DoD. When a Canadian bid is successful,

the Pentagon negotiates with the CCC, which issues a

contract to the Canadian firm. This back-to-back contract

meets all the terms and conditions of the U.S. contract

while allowing the Canadian company to meet the labor

and environmental laws of Canada.

Under the bilateral arrangements, the Canadian Government undertakes to ensure quality control, certifies

price and delivery, and assumes contract liability should

a Canadian company fail to fulfill a contract. The CCC

also audits Canadian companies that receive U.S. contracts according to uniform auditing standards and rules

worked out with DoD. The advantage of this system for

Canadian companies is that they can operate under

Canadian law and use their normal business practices

without having to learn the intricacies of the U.S. defense

 et al., op. cit., footnote 7, p. 

 op. cit., footnote 4, p. 38.
110 . Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

procurement system. U.S. prime contractors also benefit

from the Canadian Government’s pledge that subcontracts awarded to Canadian companies will be fulfilled

U.S. subcontractors complain, however, that the Canadian Government’s guarantee gives Canadian firms an

unfair competitive advantage in bidding for DoD contracts.

The second type of U.S.-Canadian defense trade

involves a large volume of direct cross-border supply and

subcontracting relationships between U.S. and Canadian

firms. After Canada tightened its export controls on goods

of U.S. origin, there was no longer a need to require

permits for cross-border transfers of dual-use products.

As a result, this type of defense trade is not handled

through government agencies such the Defense Logistics

Agency or the CCC. Instead, company-to-company

defense trade is simply aggregated into the general trade

figures, and there is no easy way to disaggregate it.19 The

Canadian Embassy in Washington estimates that roughly

60 to 65 percent of all U.S.-Canada defense trade is in the

form of commercial contracts between Canadian suppliers and U.S. primes or subcontractors. While the Canadian Embassy attempts to monitor this trade, it lacks the

resources to do so completely.

Fragmentary data suggest that because of the high level

of integration between the two economies at the subtier

level, as well as the flow of goods between parent

companies and subsidiaries, there is a much higher level

of cross-border trade in parts and components between

U.S. and Canadian firms than the official defense-trade

statistics would suggest. Certain suppliers provide “dualuse” goods (e.g., structural components or fasteners) that

have no clear defense application until they are actually

incorporated into a weapon system. Moreover, Canadian

firms producing subsystems for U.S. prime contractors

often procure parts from U.S. subtier suppliers. According

to one estimate, 56 percent of all materials and supplies

incorporated into Canadian defense products come from

U.S. industry sources.

20 This estimate suggests that

participation by Canadian firms in U.S. defense contracts

provides expanded business opportunities for U.S. subtier

suppliers, although the exact magnitude of this multiplier

effect cannot be determined.

Obstacles to Defense Trade

In theory, the mutual benefits provided by the DD/

DPSA regime should have resulted in a highly integrated

North American Defense Industrial Base, with extensive

access by Canadian firms to the U.S. market and a rough

balance in defense trade between the two countries.

Despite some notable achievements, however, CanadianAmerican defense trade has experienced persistent problems.

First, the long-term balance in defense trade promised

in 1963 has not been achieved. During the Vietnam War,

Canadian defense sales to the United States surged

dramatically. Between 1%5 and 1971, Canada had a

positive defense-trade balance with the United States of

nearly US$500 million. This major imbalance came at a

time when U.S.-Canadian political relations were strained

by Ottawa’s official criticism of the war. In response, U.S.

officials concerned with the balance-of-payments deficit

joined forces with protectionists and conservatives in

Congress to pass a series of laws restricting U.S. defense

purchases from Canada.21 Rising U.S. protectionism in

turn convinced the Trudeau government to seek greater

trade and political links with Western Europe, including

the purchase of the German Leopard I tank and an Italian

127mm naval gun for Canada’s four Tribal-class destroyers.

22

In 1975, the defense-trade balance shifted in favor of

the United States when a major reequipment of the

Canadian forces resulted in orders for 18 Lockheed

CP-140 Aurora maritime reconnaissance aircraft and 138

McDonnell Douglas CF-18 Hornet fighters. 23 Over the

past decade, the United States has consistently recorded

a defense-trade surplus (see figure A-1) because Canadian

purchases of major U.S. weapon systems are still being

paid off. In 1989, for example, Canadian defense imports

from the United States were 1.4 times greater in value than

Canadian defense exports to U.S. customers.24 Increased

defense sales to the United States remain an important

Canadian policy objective.

The U.S.-Canada Free Trade Agreement (FTA), which

entered into force on January 1, 1989, explicitly excludes

pure defense products such as combat systems, although

it does cover government procurement of dual-use items.

l~amsom op. cit., fOOtnOte 4$ P. 8“

m~~Embassy, Cati-U.S. Defence Economic Cooperation (WashingtOrL DC, June & 1989), P. 9.

21~nt= for s~t~c ad ~t-tio~Studies,partners in D@ense: UJ’..Ca~ian cooperation in Meeting the Secm”q Challenges of the 1990s,

October 1990, p. 9.

22At ~t he, tie ~p~d I ~wsent~ the ~test t~~ol~~. me U.S. M-1 @& WM SW in ~v~~ er@eer@ development and production

models would not have been available in the period requested by the Canadian Armed Forces. Moreover, the Leopard I could be supported in Europe,

where all of Canada’s heavy armor was deployed. These purchases have remained anomalies, however, since all of Canada’s other tracked armored

vehicles and military aircraft have been purchased horn the United States.

zsJohnstoq op. cit., foolnote 16, p. 26.

u~ti~bmv, op. cit., footnote 20, P. 6.
Appendix A-The North American Defense Industrial Base: Canadian and Mexican Contributions . 111

Figure A-1--Canada-U.S. Defense Trade Under the

1985

1986

1987

1988

1989

DD/DPSA Agreement, 1985-1989

~~J

2000 1000 0 1000 2000

Millions of Canadian dollars

m Canadian defense m Canadian defense

imports from U.S. exports to U.S.

SOURCE: James Fergusson, Canadian De fence Trah and Europe:

Methocblogica/ Concerns and Empirical Evidence, Center for

Studies in Defence Resources Management, Solicited Research Report #4 (Kingston, Canada: National Defence College, Fall 1990), Table V1.

The rationale for excluding most defense products from

the FTA was that they were already covered by the

DD/DPSA agreements and represented a relatively small

trade volume compared to most commercial sectors.

Because the DD/DPSA agreements do not have treaty

status, however, they are vulnerable to protectionist laws

and nontariff barriers imposed by each country.

A variety of protectionist U.S. laws affect Canadian

defense contractors, including U.S.-owned subsidiaries

based in Canada. These statutes include the recurring

amendments to the annual Defense Appropriations Act,

which are incorporated into the Defense Federal Acquisition Regulation Supplement (DFARS). For example, the

Berry Amendment prohibits the Department of Defense

from procuring food, clothing, fibers, and tools from

foreign sources; the Bayh Amendment restricts foreign

R&D contracting; and the Byrnes-Tollefson Amendment

rules out foreign construction of any naval vessel. (This

law has even been applied to block the sale by a Canadian

company of small Zodiac motorboats to the U.S. Navy.)

The Small Business Act requires that some procurement

contracts be set aside in whole or in part for small or

disadvantaged U.S. companies, thereby precluding Canadian participation. Finally, U.S. public law imposes

constraints on the cross-border flow of defense-related

information, and U.S. National Disclosure Policy specifies areas of sensitive defense technology that cannot be

disclosed to foreign countries, including Canada. These

various nontariff barriers are estimated to prevent Canadian firms from bidding on some $65 billion in U.S.

defense contracts for which they would otherwise be

eligible.25

The Canadian Government also imposes restrictions on

cross-border defense trade. Tariffs are levied on U.S.

defense goods that enter Canada, either under direct sales

or government-sponsored Foreign Military Sales (FMS)

contracts. 26 Moreover, depending on the technology and

the importance of the product, Canada generally favors

domestic suppliers. Only when procurement from Canadian sources is uneconomical or impractical does the

government turn to outside sources of supply.

Another obstacle to U.S.-Canada defense industrial

cooperation has been Canada’s insistence on offsets in its

27 Beginning with acquisition of major weapons systems.

the purchase of the CP-140 Aurora maritime reconnaissance aircraft from Lockheed in 1975, the Canadian

Government instituted a policy that foreign contractors

competing for a Major Crown Project (worth more than

Can$100 million) are expected to offer benefits to

Canadian industry, such as technology transfer and

production-sharing arrangements. This policy was shaped

to a large extent by Ottawa’s desire to use large military

procurement programs to foster industrial expansion in

the less-developed provinces, to enhance the overall

international competitiveness of Canadian industry, and

as a payback to the domestic economy for large outlays of

taxpayers’ money for foreign-sourced equipment.

In addition to barriers created by legislation and

industrial-benefits policy, U.S.-Canada defense trade has

been hampered by ignorance on the part of government

and industry officials about the bilateral defenseindustrial relationship. Canadian Embassy officials contend that they must often intervene to inform DoD

contracting officers that under the DD/DPSA agreements,

Canadian companies are to be treated differently than

other foreign firms.

Joint Industrial Preparedness Planning

A memorandum of understanding (MOU) signed in

1970 gave Canadian firms the opportunity to participate

~~te~iew with Michael SISClq a defense analyst at the Centre for Intemationsl and Strategic Studies, York Urdversily, mtio,~ti.

2-~ ~stoms re@tiom ~fitthe mfid of duties o~y for Us. components u~ for fie ~ufac~ of (!atlaM goods that are th~

reexported in new condition. Nevertheless, under the Free Trade Agreemen~ these tariffs will be phased out over a 10-year period ending in 1999.

27~cor~gto suchmWements, the ~llerof defae@pment provides & p~c~~g~lmfqwith ~~ontracfi, p~uction Sk@, kChIIOIOgy,

and other direct benefits to the Canadian economy that help offset the cost of the contract.
112 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

in the U.S. Industrial Preparedness Planning program

(IPPP), in which manufacturers commit themselves to

respond to a U.S. demand for surge or mobilization

production in wartime. About 86 Canadian firms are

currently considered as “planned producers” for specialized components, assemblies, and parts. Participation in

the IPPP program guarantees Canadian firms the opportunity to bid on any U.S. defense contract over $10,000 on

an equal footing with U.S. firms, and also limits the

percentage of the contract that can be set aside for U.S.

small business. These measures help ensure that the

participating Canadian firms could contribute effectively

to U.S. surge production in an emergency.

In 1985, President Reagan and Prime Minister Mulroney reaffirmed their commitment to the DD/DPSA

agreements and pledged to reduce the legislative and

administrative barriers to cross-border defense trade. The

first tangible step in the direction of enhanced cooperation

came in March 1987, when the United States and Canada

established a joint North American Defense Industrial

Base Organization (NADIBO). This body has no direct

role in peacetime weapons acquisition. Instead, NADIBO

is an emergency surge/mobilization planning organization that gathers information, performs analyses, maintains a large database, and coordinates the activities of

several Federal departments and agencies with an interest

in defense industrial preparedness. There are two plenary

meetings a year: a spring planning session that brings

together industrial-base planners from the two governments, and a fall workshop to which industry representatives are invited.

Through NADIBO, the two governments have focused

primarily on joint industrial preparedness planning (lPP)

as a means of identifying deficiencies and bringing about

corrective actions aimed at strengthening the North

American Defense Industrial Base. For example, an

Ammunition Task Force has discussed the ammunition

supply problem and possible joint solutions. NADIBO

also organized a joint task force on surge production of

precision-guided munitions (PGMs) to determine whether

Canadian firms could manufacture components for which

the United States was already dependent on offshore

sources of supply. Of the 284 critical items assessed in the

study, an actual or potential Canadian production capability was identified for 239 (or 84 percent) of the required

components and raw materials. A similar analysis of the

M1A1 Abrams tank revealed that the necessary production technology existed in Canada for all but one of the

129 subsystems.28

Despite such joint planning efforts, however, NADIBO’s

effectiveness has been limited by its lack of executive

authority and financial resources, and the participation of

a large number of government agencies with divergent

interests. As a result, the organization has been unable to

generate the clear directives and guidelines needed to

coordinate the activities of procurement managers and

industrial-base planners. According to Col. Clement

Lavoie, head of the Canadian Directorate of Defence

Industrial Resources, joint production base analyses have

had little real impact because “IPP is not always at the

forefront of decisionmaking in the materiel acquisition

process.’ ’29

Both Canada and the United States face the challenge

of restructuring their defense industries to meet the

expected requirements of their armed forces at significantly lower levels of defense spending. Because Canadian defense companies now export 70 percent of sales,

mainly to the United States, impending cuts in U.S.

defense spending will have a significant impact on the

Canadian defense industrial base. In addition, the economic integration of the European Community by the end

of 1992 may displace North American defense contractors

from parts of the European market, while U.S. prime

contractors that do make military sales to Europe will

increasingly be required to negotiate offsets involving

subcontracts to European firms rather than Canadian

ones. As a result, Canadian defense companies can expect

to face increased economic competition from both U.S.

and European firms in the vital U.S. defense market, as

well as growing protectionism designed to reserve more

of that market for U.S. industry.

U.S. Defense Production in Mexico

The third largest U.S. trade partner, with bilateral

commerce worth $52 billion in 1989, Mexico has long

been an attractive location for U.S. industry because of its

extremely low labor costs. In 1965, in an effort to relieve

unemployment near the U.S. border, the Mexican Government established special customs treatment and liberal

foreign-investment regulations for foreign assembly

plants operating on Mexican territory. These assembly

plants, known as maquiladoras, may be 100-percent

foreign-owned and managed. They can import into

Mexico duty-free the raw materials, machinery, parts, and

other components used in the assembly or manufacture of

products, which must then be exported back to their

country of origin or to a third country. Since U.S. customs

regulations provide for duty-free reentry into the United

States of goods assembled in another country from

components of U.S. origin, duty must be paid only on

those components not of U.S. origin and the value added

by assembly or manufacture in Mexico.

2%UPPIY and s~icm canada, The Defence ZndusfriaZ Base Review 1987 (Ottawa: SuPply and Services C%nada, 1987), P. 10.

zgcol. Clement E. Lavoie, “U.S./Canada Armament Cooperation and the North American Defense Industrial BaaeA Challenge for the 1990s”

(Washington DC: Industrial College of the Armed Forces, Fort McNair, 1990), p. 13.
Appendix A-The North American Defense Industrial Base: Canadian and Mexican Contributions ● 113

In 1982, a major devaluation of the Mexican peso with

respect to the dollar made production of labor-intensive

goods in Mexico highly attractive, resulting in a tripling

of the size of the duty-free assembly program between

1982 and 1988. Today, some 1,795 maquiladoras annually generate more than $12 billion in products and over

$2 billion of value-added income for Mexico. The

majority are foreign-owned, primarily by U.S. companies

but also by firms from Japan, Sweden, France, Canada,

Taiwan, Hong Kong, and Korea.30

Several U.S. defense contractors have established

maquiladoras in the border area for the production of

wiring harnesses and PC boards for missiles, radars,

aircraft, and telecommunications equipment, including

Emerson Space, GE Aerospace, Stuart-Warner, General

Dynamics, TRW, and Westinghouse. Some more diversified defense contractors, such as Rockwell International,

use Mexican assembly plants for commercial rather than

defense business: Rockwell’s four plants produce controllers for machine tools and data modems for fax machines.31 Still, the plants owned by U.S. prime contractors

may only be the tip of the iceberg. Numerous second-and

third-tier suppliers of defense components may also

operate maquiladoras, although such dual-use production

is difficult to track

The governments of the United States and Mexico are

currently negotiating a free trade agreement that would

eliminate restrictions on the flow of goods, services, and

investment between the two countries. A North American

free-trade zone encompassing the United States, Canada,

and Mexico would constitute the world’s largest market,

with annual production totaling more than $6 trillion and

almost 370 million consumers. U.S. objectives in the

negotiations with Mexico include a reduction of tariffs to

zero over a period of years, the elimination of most

nontariff barriers on goods and services, an open investment climate, and full protection of intellectual property

rights. 32 The proposed agreement has become highly

controversial in Congress: advocates contend that it

would stimulate economic growth and increase net

employment on both sides of the border, thereby promoting political stability in Mexico; opponents counter that

it could cause severe job losses in the United States,

accelerate the decline of ailing U.S. manufacturing

industries, and lead to severe industrial pollution along

the U.S.-Mexican border.

If negotiated, a free trade agreement with Mexico

would accelerate the current integration of the U.S. and

Mexican industrial bases.33 Both the U.S. and Canadian

governments are concerned, however, that a U. S.-

Mexican free trade agreement might enable third countries to use Mexico as a staging area for a new surge of

exports to North America, performing minimal assembly

work in Mexico in order to gain duty-free access to U.S.

and Canadian markets. In order to rule out this possibility,

the United States plans to negotiate strict rules of origin

that will reserve preferential market access to the signatory countries. Furthermore, whether or not defense trade

is explicitly included in a U.S.-Mexico free trade agreement, dual-use components and subsystems assembled in

Mexico could be exported to the United States or Canada

and then, under the provisions of the U.S.-Canadian

DD/DPSA agreements, transshipped duty-free across the

U.S.-Canada border. It may therefore be necessary to

amend the DD/DPSA to cover such contingencies.

Policy Considerations

An important issue facing Congress is whether to

promote the further integration of the U.S. and Canadian

defense industries and the emerging Mexican defense

industrial base. Such integration involves tradeoffs between the overall U.S. national interest in efficient

weapons procurement and industrial mobilization capacity and the interests of local communities in the United

States that are economically dependent on defense

production. The issue of NADIB integration is also part

of the larger debate over whether the Nation should place

greater reliance on U.S. domestic firms or on defenseindustrial interdependence with allies.

Canada is unique among U.S. allies in that it is both a

leading purchaser of major U.S. weapon systems and a

key supplier of subsystems, components, and materials to

the U.S. defense industry. Although the Canadian defense

industrial base is small, it can supply DoD and U.S. prime

contractors with some products of higher quality and

lower price than competing U.S. firms. Moreover, since

Canada relies extensively on U.S. weapon systems, there

is a large overlap in requirements between the two

countries. At the same time, there is little direct competition for export sales, which complicates cooperation with

the major European allies. Further, the existence of a

second, technologically sophisticated defense industry on

the North American continent gives the United States a

valuable source of surge and mobilization capacity in

crisis or war.

The objective of greater NADIB integration would be

to rationalize defense production within the North American continent by enabling both countries to specialize in

the areas where they are most proficient. Congress could

help achieve this goal by removing some or all of the

30cO~tt= for tie ~omotion of ~ve~~ent in Mexico, An Oveniew of the J.@~”J&ora z~~ in Mexico (mijIRQ), hl~ 1990, p. 3.

sl~lephone interview with Ray Garci& Rockwell hlt-tied.

32u.s. Department of State, Bureau of Public Afftis, ‘‘US-Mexico Free Trade Agreement” gist, December 1990.

Sssee Clark W. Reynolds, “Integrating the U.S. and Mexican Economies,“ Business W.xico, vol. 7, No. 4, December 1990, pp. 11-15,69.
114 ● Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

existing legislative and policy barriers to free trade in

defense and dual-use products between the two countries

and by appropriating funds for the codevelopment and

coproduction of defense equipment by U.S. and Canadian

firms. The repeal of U.S. protectionist legislation might be

made conditional on Ottawa’s willingness to drop its

offset requirements.

Such congressional action would need to be supplemented with additional measures by the executive branch.

For example, the U.S. and Canadian defense departments

might seek improved coordination in defense R&D policy

and a more liberal policy on cross-border transfers of

technology so that the research of both countries could be

utilized more efficiently. Joint U.S.-Canadian industrial

preparedness planning might also be expanded.

Greater NADIB integration would offer political,

economic, and military/strategic benefits for the United

States and Canada. First, both countries could benefit

from the exchange of technological know-how in areas of

complementary advantage. Second, because of geographical proximity and the high degree of commonality in the

critical defense items employed by the U.S. and Canadian

armed forces, security of wartime supply for both

countries could be enhanced. Third, gaining access to

some of the Canadian defense products now excluded

from the U.S. market by protectionist legislation could

enable DoD to obtain items of superior quality or reduced

cost.

Greater NADIB integration would entail some drawbacks, however. First, at a time of shrinking defense

budgets, awarding defense contracts to companies across

the border would be politically difficult for either

government if domestic firms are hurt. Second, there are

clear political limits to integration. Canada and the United

States are both sovereign nations with their own interests,

foreign policies, and public laws, which would have to be

respected in any bilateral arrangements.

Opponents of greater NADIB integration argue that

Congress should seek to minimize the adverse effects on

the U.S. economy of defense-spending cuts by adopting

a “Buy American” policy that would close the U.S.

defense market to Canadian firms. Such protectionist

measures would enable U.S. companies to preserve a

larger share of a shrinkm- g defense market, ensuring that

taxpayer money allocated to defense is reinvested in the

U.S. economy and American jobs. Nevertheless, a unilateral cutback in defense industrial cooperation with

Canada would have a negative effect on overall U. S.-

Canada relations. Conceivably, it could provoke retaliatory actions by the Canadian Parliament, such as the

refusal to purchase major U.S. weapons systems in the

future or even calls for the repeal of the Free Trade

Agreement.

Increased defense-industrial integration with Mexico

would also have benefits and costs. On the plus side,

relocation of labor-intensive manufacturing and assembly

operations to Mexico could enable U.S. defense contractors to lower their labor input expenses and thereby reduce

overall procurement costs to DoD. On the minus side,

some U.S. manufacturers (particularly at the subtier level)

will have difficulty competing and may thus be forced out

of the defense business. Further, greater reliance on

Mexican assemblers might entail some risk to security of

wartime supply.

As a practical matter, however, the shift of some

defense manufacturing and assembly work to plants based

in Mexico would probably have little adverse effect on the

ability of the U.S. defense industry to mobilize in a crisis.

Because of stringent military specifications and restrictions on classified work manufacturing and assembly in

Mexico is likely to remain limited to labor-intensive

production of noncritical dual-use items, such as subassemblies and subcomponents.
Appendix B

Industrial Base Models and Databases

Introduction

Access to accurate and timely information and analysis

on the defense technology and industrial base (DTIB) will

be essential to manage the transition to a downsized yet

efficient base. Although the various Services and defense

agencies have constructed databases and models aimed at

fulfilling their specific missions, these efforts have been

uncoordinated. As a result, it is difficult to obtain a broad

overview of the national defense-industrial capabilities

and requirements in particular sectors (e.g., electronics).

Moreover, while the quality of available data may be good

at lower levels, the data are not presented in a form or at

a level of aggregation useful to national decisionmakers.

In addressing this problem, it will first be necessary to

decide what types of information and models are needed

for national DTIB policymaking and how much the

Nation is willing to pay for this analytical capability.

Since the majority of analysts working on this problem

agree that it would be costly and time-consuming to

collect and enter large amounts of information into a

single integrated DTIB database, it would be preferable to

find ways of coordinating the existing databases and to

make better use of current industrial base models than to

develop any major new capabilities. While networking

among databases is now technically possible, such an

approach would require major procedural changes.

This appendix reviews the major DTIB models and

databases for defense manufacturing data, outlines some

steps for improving overall database and modeling

capabilities, and considers future approaches for providing key decisionmakers with accurate and timely industrialbase information. Many of these issues were examined in

detail at a North American Defense Industrial Base

Organization (NADIBO) Industrial Base Data Workshop.l To gain further insights into the issue of defense

industrial database and model needs and current capabilities, OTA sponsored a l-day workshop on DTIB information requirements and capabilities. Participating in the

OTA workshop were analysts involved in model development, senior officials from the Department of Defense

(DoD), the Department of Commerce, and the Federal

Emergency Management Agency (FEMA), and congressional staff members.2

Current Models and Databases

Individual military organizations and commands have

developed a number of computer models and databases to

support DTIB decisionmaking and to keep track of

vendors involved in the acquisition of particular systems

(see table B-l). Some of the recent models, including the

Joint Chiefs of Staff’s Joint Industrial Mobilization

Planning Process (JIMPP), FEMA’s Resolution of Capacity Shortfalls (ROCS), and the Office of the Secretary of

Defense’s Defense Industrial Network (DINET), incorporate a hierarchy of submodels of industrial sectors and

subsectors, along with databases, making it possible to

assess the ability of selected industrial sectors to meet the

military demands for a specific crisis or wartime scenario.

Collecting and updating the data needed to keep these

systems current is difficult and costly, and in many cases

has not been adequately supported.

The JIMPP model developed for the Joint Chiefs of

Staff has been constructed to deal with DTIB issues both

at the level of industrial sectors and individual firms. It is

the most ambitious and sophisticated of all of the models

shown in table B-1 in its ability to deal with the defense

industrial requirements of a given scenario. JIMPP has

been used to support DoD mobilization exercises and

analysis of the national stockpile. Its principal drawback

is the lack of accurate data on the ability of specific

industries to produce goods during an emergency. The

ROCS model is currently being expanded and made more

flexible. This upgrade will make the output of ROCS

more comparable to those of JIMPP and allow closer

coordination between FEMA and the Joint Chiefs of Staff

on industrial mobilization matters.3

DINET differs from the others shown in table B-1 in

that it is not a model and embodies no analysis or

simulation. Instead it is a collection of numerous databases on suppliers and procurement activities and can be

queried to extract information about a wide range of

topics concerning the base. DINET has recently been

revamped to provide a more complete picture of the

current DTIB. It is now structured to answer questions

related to: acquisitions, mergers, and takeovers; dependencies on single and foreign sources; the effects of

government policies on the industrial base; surge and

mobilization in crisis and war; U.S. ability to respond to

and recover from natural disasters; and critical defenseINOfi ~eri~~Def~e~dus~ Bme ~g-tion, Sfiengthening Defe~e ~anufuc~ring Data: proceedings ofIndustn”alBase Data Technical

Workshop (Daytom OH, Apr. 18-20, 1990).

~orkshop participants are listed at the front of this qort.

3~~*O ~a new industri~ ~se model c~ed tie Mtemted Civilti ~dustri~ Mobi.l~tion P]-pro@ss (ICIMPP), but tit model WX

not ewduated during the OTA workshop.

-115–
116 . Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base

Table B-l—Models and Databases Currently in Use for Evaluating the DTIB

Model

Acronym Full name of model Type Proponent/User Developer

DID

DINET

EDIO

IMAP

JIMPP

MAX DSS

NAVEASY

NIIS

ROCS

STIM

TASCFORMMOBE

TASCMAIN

Defense Industrial Demand Model

Defense Industrial Network

Energy Disaggregate Input/Output

Model

Industrial Mobilization Analytical

Process

Joint Industrial Mobilization Planning

Process

Maximum Army Expansion Decision

Support System

Navy Economic Analysis System

National Infrastructure Information

System

Resolution of Capacity Shortfalls

Systems Dynamic Model For Testing

Industrial Mobilization

Technique to Assess Comparative

Force Mobilization

Technique for Assessing the

Capability to Mobilize American

Industry

macro

set of databases

macro

macro, multiple

macro/micro,

multiple

micro, multiple

macro/micro

general, multiple

macro

macro/micro,

general

micro/macro

macro, multiple

Department of Commerce, Office of

Policy Analyses

Office of the Undersecretary of

Defense (Acquisition), Office of

Industrial Base Assessment (DoD)

Department of Commerce, Office of

Policy Analyses

Army Material Command, Industrial

Engineering Activity

Joint Chiefs of Staff-J4

Army Material Command, Industrial

Engineering Activity

NavSea Shipbuilding Support Office

Federal Emergency Management

Agency

Federal Emergency Management

Agency

Army Material Command, Industrial

Engineering Activity

Office of the Secretary of Defense,

Program Analyses and Evaluation,

and Office of the Undersecretary of

Defense (Acquisition)

Office of the Secretary of Defense

in-house

Systems

Research and

Analyses Corp.

and in-house

in-house

General

Research Corp.

Institute for

Defense

Analyses

in-house

in-house

in-house

in-house

General

Research Corp.

The Analytic

Sciences Corp.

The Analytic

Sciences- Corp.

SOURCE: OTA Defense Industrial Base Database Workshop, 1990.

related technologies. Nevertheless, DINET is not currently capable of providing a comprehensive view of the

manufacturing subtiers or the ability of the base to

respond to emergency requirements.

Problems With Current Models

and Databases

Officials attending the OTA workshop expressed

dissatisfaction with available models, data, and collection

plans. Some specific problems were noted:

●

●

●

Most of the current models are not linked to one

another, limiting their usefulness beyond those

specific problems for which they were designed.

All DTIB models are short of data because data

collection efforts are generally underfunded and are

not standardized.

There are major differences in the methodology and

rigor with which industrial preparedness data are

collected and validated. Each Service and model

developer independently collects and evaluates its

own data according to its own procedures, including

questionnaires, interviews, solicitations, and other

methods.

From a technical standpoint, there is no reason why the

models and databases cannot be linked and the data

standardized. But in order for such integration to occur,

the organizations that possess the models and data would

have to cooperate. Currently, most of these organizations

see few incentives to do so. As issues become more global

and cross departmental boundaries, however, cooperation

becomes more essential.

Solving the Problems

At the OTA workshop, participants made the following

observations and recommendations.

Senior decisionmakers need to specify what types of

DTIB information they need. The types of information

required by officials varies depending on their level and

responsibilities. For example, in a crisis the Secretary of

Defense would be interested in the overall ability of the

DTIB to respond and support overall U.S. military

objectives. This broad question would then be broken

down into specific questions about the production of U.S.
Appendix B--Industrial Base Models and Databases ● 117

weapon systems, critical components, and the extent and

projected duration of the crisis. Program managers and

contractors also require an indication of the priority of

weapon systems for surge and mobilization in the

particular contingency.

Because DTIB information requirements can be large,

there is a need to develop priorities on what types of data

are essential to gather and maintain. Several methods for

identifying weapon system development and procurement priorities have been established within DoD. For

example, the Commanders-in-Chief’s Critical Items List

(CINC-CIL) identifies those weapon systems that the

CINCs determine are essential for achieving their wartime

missions. The Master Urgency List (MUL) prepared by

the Office of the Secretary of Defense (OSD), sets overall

priorities for procurement. The Weapon Systems Essentiality Code is used by the Defense Logistics Agency to

ensure maximum supply support for high priority weapons in the field. Finally, the Key Asset Protection Plan

(KAPP), maintained by U.S. Forces Command, contains

the names and addresses of contractor facilities that the

Services and Defense Agencies view as essential for

defense production and thus should be protected by U.S.

military forces against sabotage. These various indicators

of priority are by no means exhaustive, nor may they be

the best for industrial base planners to use in developing

data collection plans. OSD, in conjunction with the

CINCs and the other defense agencies, should therefore

perform a thorough analysis of these various systems to

determine their relevance for defense industrial responsiveness in a crisis, as well as peacetime development of

weapon systems and other DTIB requirements.

To date, a high-level commitment to obtaining data on

the DTIB has been lacking. A good example is that the

most recent input/output table of the U.S. economy

published by the Census Bureau describes the economy

as it existed in 1977, making it of historical interest but of

little practical value to DTIB planners. Moreover, while

the Census Bureau collects extensive corporate data that

could be used to answer many DTIB questions, under

Title 14 of the U.S. Code requiring the protection of

proprietary data, the Census Bureau is prohibited from

making this information available to other U.S. Government agencies for analytical purposes. Solutions to the

problem of obsolete data include: more funding for data

gathering, greater reliance on the Commerce Department

to provide analytical support, and a proprietary information security system.

Current DTIB databases and models concentrate on

prime contractors for weapon systems and major subcontractors. Monitoring the health of subtier suppliers is

difficult and has been neglected in current databases.

Since many of these firms provide important spec ialized

technology, however, keeping track of selected capabilities is important. Several participants in the OTA

workshop argued that it would be too costly to establish

and maintain a complete database on subtier suppliers of

parts and subsystems, and that such data should be

gathered only for critical items. This observation again

points to the importance of developing priorities for data

collection.

Participants in the OTA workshop concluded that DoD

organizations and Canada (as part of the North American

Defense Industrial Base) should collectively adopt a

standard weapon system coding scheme to support

analyses, acquisition decisions, and industrial preparedness planning. Most current data have been collected

without the use of any standard definitions or formats,

making it difficult to know the mcaning of a given data

element and virtually impossible to cross-reference information in different databases. The result is a “Tower of

Babel” of databases that cannot communicate with one

another. The lack of a common identification scheme also

limits DoD’s ability to assess the capabilities of subtier

suppliers. If the Joint Chiefs of Staff employed a coding

scheme to identify equipment for the CINCs’ Critical

Items List, it would significantly improve the information

available for DTIB assessments.

Mechanisms must also be created for improved coordination among databases. Much of the DTIB information

required by decisionmakers is already contained in a

variety of databases developed and maintained by the

individual Services, the Defense Logistics Agency, the

Office of the Secretary of Defense, and the Joint Chiefs of

Staff. Technology currently exists for networking databases installed indifferent types of computers. Since each

database has a “dictionary” describing the data it

contains, it should be possible to interlink these dictionaries to permit cross-referencing among databases. Thus,

instead of creating a new centralized database at enormous

cost, data from existing dispersed databases could be

exchanged in a coordinated fashion.

Summary

Achieving either of the DTIB objectives of responding

to crisis or producing affordable weapons in peacetime

requires information and analytical modeling support.

OTA workshop participants indicated that models and

databases exist at various levels to support many of DoD’s

information requirements. There is a need for high-level

officials to determine what types of DTIB data are

essential for decisionmaking and to support data collection and maintenance. Any new effort should make use of

existing models and databases rather than starting over.
Related OTA Reports

● Holding the Edge: Maintaining the Defense Technology Base.

OTA-ISC-420, 4/89; 200 pages. GPO stock #052-003-01150-6; $9.00.

Free summary available from OTA.

NTIS order #PB 89-196 604/AS

● The Defense Technology Base: Introduction and Overview.

OTA-UK-374, 3/88; 124 pages.

NTIS order #PB 88-192562

● Global Arms Trade: Commerce in Advanced Military Technology and Weapons.

OTA-ISC-460, 6/91; 192 pages. GPO stock #052-O03-O1244-8; $9.00.

Free summary available from OTA.

● Making Things Better: Competing in Manufacturing.

OTA-ITE-443, 2/90; 244 pages. GPO stock #052-003-01178-6; $11.00.

Free summary available from OTA.

NTIS order #PB 90-205469

NOTE: Reports are available from the U.S. Government Printing Office, Superintendent of Documents,

Washington, D.C. 20402-9325 (202-783-3238); and the National Technical Information Service, 5285 Port

Royal Road, Springfield, VA 22161-0001 (703-4874650).