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i 

71–450 2012

[H.A.S.C. No. 112–79] 

THE DEFENSE INDUSTRIAL BASE: 

A NATIONAL SECURITY IMPERATIVE 

HEARING 

BEFORE THE

PANEL ON BUSINESS CHALLENGES WITHIN THE 

DEFENSE INDUSTRY 

OF THE

COMMITTEE ON ARMED SERVICES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 24, 2011 
(II) 

PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

BILL SHUSTER, Pennsylvania, Chairman 

BOBBY SCHILLING, Illinois 

JON RUNYAN, New Jersey 

ALLEN B. WEST, Florida 

RICK LARSEN, Washington 

BETTY SUTTON, Ohio 

COLLEEN HANABUSA, Hawaii 

LYNN WILLIAMS, Professional Staff Member 

TIMOTHY MCCLEES, Professional Staff Member 

CATHERINE SENDAK, Research Assistant 
(III) 

C O N T E N T S 

CHRONOLOGICAL LIST OF HEARINGS 

2011 

Page 

HEARING: 

Monday, October 24, 2011, The Defense Industrial Base: A National Security 

Imperative ............................................................................................................. 1 

APPENDIX: 

Monday, October 24, 2011 ....................................................................................... 29 

MONDAY, OCTOBER 24, 2011 

THE DEFENSE INDUSTRIAL BASE: A NATIONAL SECURITY 

IMPERATIVE 

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS 

Larsen, Hon. Rick, a Representative from Washington, Ranking Member, 

Panel on Business Challenges within the Defense Industry ............................ 2 

Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman, Panel 

on Business Challenges within the Defense Industry ...................................... 1 

WITNESSES 

Chao, Pierre, Senior Associate, Center for Strategic and International Studies .......................................................................................................................... 6

Downey, Fred, Vice President, National Security, Aerospace Industries Association .................................................................................................................... 4 

Watts, Barry, Senior Fellow, Center for Strategic and Budgetary Assessments ..................................................................................................................... 3 

APPENDIX 

PREPARED STATEMENTS: 

Chao, Pierre ...................................................................................................... 61 

Downey, Fred .................................................................................................... 47 

Larsen, Hon. Rick ............................................................................................. 35 

Shuster, Hon. Bill ............................................................................................. 33 

Watts, Barry ..................................................................................................... 37 

DOCUMENTS SUBMITTED FOR THE RECORD: 

AIA White Paper, Building and Maintaining Value in the National Security Space Industrial Base ........................................................................... 103 

Summary from Industry Roundtable, Rock Island, IL .................................. 97 

WITNESS RESPONSES TO QUESTIONS ASKED DURING THE HEARING: 

Ms. Hanabusa ................................................................................................... 111 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING: 

Ms. Hanabusa ................................................................................................... 115 

(1) 

THE DEFENSE INDUSTRIAL BASE: A NATIONAL 

SECURITY IMPERATIVE 

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, PANEL ON BUSINESS CHALLENGES WITHIN

THE DEFENSE INDUSTRY, Washington, DC, Monday, October 24, 2011. 

The panel met, pursuant to call, at 3:02 p.m., in room 2212, Rayburn House Office Building, Hon. Bill Shuster (chairman of the 

panel) presiding. 

OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

Mr. SHUSTER. The hearing will come to order. I want to thank 

everybody for joining us here today. It is especially good to see my 

colleagues back from our recess. I hope it was productive for everybody. I believe that today’s hearing will serve as a foundational discussion for this panel as it moves forward in its working to examine the challenges of doing business with the Department of Defense [DOD]. The House Armed Services Committee [HASC] has 

led the way in improving how DOD develops and buys equipment 

and needs. As most of you know, the HASC has successfully shepherded a substantial reform effort, the Weapons System Acquisition Act, through the legislative process to the President’s desk. 

While the bill did much to garner efficiency, increase transparency 

and foster competition, there is still room for improving DOD’s 

business practices. 

I am a strong believer in the fact that you can’t solve the problem without looking at both sides of the equation. And that is exactly why Chairman McKeon and Ranking Member Smith established this panel, to look at the business side of the DOD acquisition system. I wanted to start this series of hearings with a broad 

look at the defense industrial base [DIB] to give the panel a clear 

framework for moving forward. Today we have well-recognized 

leaders in public policy regarding the defense industrial base joining us. 

On November the 1st, we will follow up with senior officials from 

DOD’s Manufacturing and Industrial Base Policy office and Small 

Business office to give us their views on the issue. After that, we 

will move on to several hearings focused on some of the specific 

issues and challenges facing the businesses that are eager to provide technologies and services to support our warfighters. 

We have some terrific witnesses with us today, and I am very 

grateful that they have taken the time to share their insights and 
2 

expertise on the defense industrial base with my colleagues. I 

would like to introduce them. First, Mr. Barry Watts, Senior Fellow 

at the Center for Strategic and Budgetary Assessment [CSBA]; Mr. 

Fred Downey, Vice President, National Security, Aerospace Industries Association [AIA]; and Pierre Chao, Senior Associate, International Security Programs, Center for Strategic and International 

Studies [CSIS]. 

Again, gentlemen, thanks for taking the time to be here with us 

today. I also want to take a minute to thank Mr. Schilling and Mr. 

Loebsack and their hard-working staffs for hosting the panel in the 

Quad Cities area of Illinois and Iowa. We had a very informative 

discussion there with industry leaders and learned a great deal 

about what goes on at the Rock Island Arsenal. It was an extremely useful trip and I appreciate all the effort that went into it. 

I also want to thank Black Hawk College for letting us use their 

facilities to hold the meeting. 

The committee staff prepared a summary of discussion with the 

industry at Rock Island and it was provided to all of the panel 

members. Without objection, I would like that to be entered into 

the record. Hearing no objection, so ordered. 

[The information referred to can be found in the Appendix on 

page 97.] 

Mr. SHUSTER. On Friday, members of the panel will travel to 

Akron, Ohio, to hear from the industrial base in that area and to 

meet with engineers and scientists at the University of Akron who 

are engaged in efforts to help DOD prevent and mitigate corrosion. 

In these tough economic times, we have got to make sure we are 

doing everything we can to get the most out of every piece of equipment we ask the American taxpayer to provide, and mitigating and 

preventing corrosion is a critical part of doing so. I am very much 

looking forward to that trip and the discussions on developing and 

in transition critical technologies to help DOD sustain its equipment. 

I want to thank Ms. Sutton for inviting us to her district. With 

that, I turn to my friend from Washington, Mr. Larsen, for any remarks he might want to make. 

[The prepared statement of Mr. Shuster can be found in the Appendix on page 33.] 

STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE 

FROM WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY 

Mr. LARSEN. Thank you, Mr. Chairman. I appreciate the opportunity to make a brief opening statement, but also, again, to thank 

you for your leadership on this panel. The panel is tasked with 

looking at ways the Department can improve its contracting practices for the benefit of our warfighters, taxpayers and businesses. 

DOD must continue its efforts of building a strategic dynamic contracting process, one that ensures those who have great products 

do not fall by the wayside. A key component of this process is ensuring that we protect and grow our Nation’s defense industrial 

base. The U.S. defense base has a long history of producing the 

best military systems in the world. We must ensure that this con-
3 

tinues both for our warfighter and because it creates jobs here in 

the U.S. 

In August, the chairman and I heard from several businesses in 

my own district about successes and challenges that they have had 

with the DOD and with contracting. All of these, in fact, were 

small businesses. These anecdotal accounts help give us an understanding of the real-world experiences small businesses face and 

the challenges they face while trying to do contracting with a very 

large government bureaucracy. 

Today we have witnesses that have studied Department of Defense policy and laid out policy implications and reforms that we 

should seriously consider as we move forward in looking at how we 

can help small- and medium-sized businesses access the Department of Defense contracting process. I look forward to hearing today’s testimony. Thank you again, Mr. Chairman. 

[The prepared statement of Mr. Larsen can be found in the Appendix on page 35.] 

Mr. SHUSTER. Thank you. And with that, we will proceed with 

our witnesses. First, Mr. Watts. You may proceed. But I see in your 

bio here, you are a graduate of the University of Pittsburgh. So are 

you a native of western Pennsylvania, or just attended graduate 

school there? 

Mr. WATTS. No. I attended graduate school there. 

Mr. SHUSTER. All right. That is great. You don’t have that 

Pittsburghese accent. Or at least I didn’t pick up on it yet. Well, 

thank you very much for being here today. 

STATEMENT OF BARRY WATTS, SENIOR FELLOW, CENTER FOR 

STRATEGIC AND BUDGETARY ASSESSMENTS 

Mr. WATTS. Well, Chairman Shuster, Mr. Larsen, members of 

the panel, thank you very much for giving me the opportunity to 

testify. I just want to make a couple of quick comments about caveats for the Center for Strategic and Budgetary Assessment’s report 

that we put out earlier in the year. We focused pretty much on 

prime contractors and major defense acquisition programs in that 

particular report. As a very small think tank, we have very little 

capacity to do the sort of thing that Brett Lambert is trying to do 

over in the Pentagon and that is, go down to the lower tiers and 

the parts suppliers, and even the material suppliers. That is an 

enormous job and a small group like ours, it is just beyond what 

we can do. 

We also didn’t say much about some of the ITAR [International 

Traffic in Arms Regulations] constraints, the legislative constraints 

that make it difficult for the defense industrial base to access the 

global defense economy, as Jacques Gansler talked about at great 

length in his recent book, ‘‘Democracy’s Arsenal.’’ Beyond that, I 

will just make a couple of comments about the three pieces that 

were in my written statement. 

First of all—and I am not going to say much about this—I think, 

here in Congress, it is clear that this is not a normal free market 

economy when we talk about the defense industrial base. It is very 

different than consumer electronics or the automobile industry. It 

is highly regulated. The regulators and the customer are one in the 

same, the U.S. Government, and there are piles and piles of regula-
4 

tions and statutes that try to make the business processes as low 

risk as possible when you do—particularly when you do major programs. And I would certainly suggest that whatever can be done 

to try to relieve some of that burden would be useful going forward. 

Given the present fiscal situation that the Pentagon is facing, 

they have had almost a decade of growing budgets, they had 

supplementals, and now the base defense budget is surely going to 

start going down and will probably go down for a period of time 

into the future. Given that, I think it is essential for the Pentagon 

and the U.S. Government writ large to develop a coherent longterm strategy for deciding what pieces of the defense industrial 

base are really going to be important going forward over the next 

several decades and make some real strategic choices. 

We talked in the report about six or seven or eight major areas 

which we think should be invested in preferentially. We did not 

give you or suggest a list of what those are. But we think if you 

are going to have a strategy insofar as strategy is about choice, 

that you are going to have to focus on capability areas that are 

probably in the single digits. If you end up with 75 or 123 most 

important things, you just don’t have a strategy. And it is very difficult, given the interests of the various, here on the Hill and Congress, and the various services and constituencies and industry, to 

not end up with a very large list. 

So I think making that choice going forward is really critical. Let 

me just say that it is not easy. You need to start with the challenges that we will face from a national security standpoint over 

the next several decades, and that is going to be difficult enough 

figuring out what the really seven or eight, or maybe nine really 

important areas are. Then secondly, if we could get some consensus 

on what those are, there is the problem of deciding what pieces of 

the industrial base, the defense industrial base, would really support those capabilities going forward. 

I mentioned in my statement anti-access/area-denial capabilities. 

And if you thought that was important, that was an area where we 

really have invested preferentially, there is a whole range of different options that you could choose. You could buy more Aegis 

cruisers or emphasize missile defense. You might want to invest 

long term in directed energy. You might think more about submersible combatants. There are a whole range of things. Both of 

those choices, deciding what the really important threats to pay attention to over the next several decades and deciding what pieces 

of the industrial base are really critical to supporting them. Those 

are difficult choices. And with that, I will end. My 5 minutes are 

up. 

Mr. SHUSTER. Thank you very much, Mr. Watts. 

[The prepared statement of Mr. Watts can be found in the Appendix on page 37.] 

Mr. SHUSTER. With that, Mr. Downey. 

STATEMENT OF FRED DOWNEY, VICE PRESIDENT, NATIONAL 

SECURITY, AEROSPACE INDUSTRIES ASSOCIATION 

Mr. DOWNEY. Mr. Chairman, Mr. Larsen, distinguished members 

of the panel, it is a real pleasure for me to be here as a representative of more than 350 companies who are part of the aerospace and 
5 

defense industrial base. The week of September 12th was National 

Aerospace Week by congressional resolution. During that week, we 

celebrated our legacy of global leadership and aviation defense in 

space. In the coming months, several momentous decisions will be 

made about the Nation’s budget, which will ultimately affect what 

kind of aerospace and defense industrial base we will have, what 

capabilities it will possess, and whether or not we will remain the 

global leaders. Those decisions will be taken in the absence of an 

industrial base strategy, and if history repeats itself, without full 

participation from those who must manage the industrial base during what is a time of historic reorganization. 

I think most Americans would agree that the 20th century was 

defined by aerospace, and that it was largely our century because 

we were second to none in aerospace. I think the 21st century will 

also be defined by aerospace. The question is whether we are still 

going to be second to none. 

While most accept that the industrial base is a national strategic 

asset, too many choose to treat it with benign neglect, assuming 

that the free market will always work to make sure we stay second 

to none. As Mr. Watts said, although it never really was a free 

market, it was so successful that many believe it is now a national 

birthright. 

But that was then. The industrial base that existed then doesn’t 

exist today. It is a far cry from the military industrial complex of 

the Eisenhower era. In the 20 years since the cold war, nearly 150 

significant defense companies have consolidated to 6. The number 

of big companies left the market, almost none have entered it. In 

the post-cold war, consolidation has created a situation where the 

top firms have grown individually, but the market has shrunk significantly. 

So, far from being the powerhouse that many suggest, the combined annual revenue of the top seven members of the aerospace 

and defense industrial base today is about one half of the annual 

revenue of Wal-Mart. That is how it has changed since the days of 

the cold war. If these trends continue and the defense budget continues to be cut, the capability to deliver critical militarily unique 

systems will atrophy and the capability our troops and the American people expect might not be available. We have to have the capability to design, develop, produce and support complex systems. 

And that requires having programs to work on. If we don’t, the 

companies that make up our industrial base can’t continue to invest in the workforce, plant and research that might be needed. 

The impact will be felt first on our workforce. We have only half 

the workers we did 30 years ago and the recession and budget reductions already have further reduced that amount. Recent analysis performed by Dr. Fuller at George Mason University and others find that the total American job loss for just the first part of 

the Budget Control Act [BCA] will be approximately 430,000 jobs, 

and about one-third of those jobs will be from the defense, aerospace and industrial base. But it is not just jobs we are going to 

lose. It is the valuable human capital. The most brilliant and ambitious technicians, engineers and scientists have sought to work for 

the industry, but we are facing an increased competition from other 
6 

high-tech sectors for those workers. Without the challenges, we are 

not going to get there. 

We need two things: We need budgets that produce programs 

that are profitable and that reach out to the talent we need, and 

we need an industrial base strategy that gives direction and predictability that the industry leaders need to make sound strategic 

business decisions. Without those two things, it is doubtful whether 

we will have the aerospace and defense industrial base that has 

provided the capability that our soldiers, sailors and airmen and 

the American people have come to expect. Thank you, sir. 

Mr. SHUSTER. Thank you. 

[The prepared statement of Mr. Downey can be found in the Appendix on page 47.] 

Mr. SHUSTER. Mr. Chao. 

STATEMENT OF PIERRE CHAO, SENIOR ASSOCIATE, CENTER 

FOR STRATEGIC AND INTERNATIONAL STUDIES 

Mr. CHAO. Mr. Shuster, Mr. Larsen and members of the panel, 

thank you for inviting me. As was noted, I am a senior associate 

at CSIS. I am also a managing partner at Renaissance Strategic 

Advisors. So I am not only a student of the industry, but also a 

practitioner in it. You are asking a great question in terms—and 

an important one, particularly given the budget environment that 

we are entering into. However, it is a question that you need to, 

I think, approach with caution, because one of the worst things 

that one can apply when it comes to defense industrial policy is a 

one-size-fits-all mentality. In fact, more damage has been done to 

the industry by trying to apply these one-size-fits-all policies. We 

would suggest that thinking about the industry as a whole in sort 

of three constituent parts: The emerging technologies and companies, think cyber, think directed energy, think mobile applications, 

the new technologies of today as one sort of group that has its own 

issues and topics. 

You then have the core part of the market, or the mature part, 

the constituents of Mr. Downey, the Lockheeds, the Northrops and 

the Boeings of the world and their supplier base to Mr. Larsen’s 

point, that there is a whole small business community. And then 

there is the much more mature legacy component. Those are the 

remaining sort of monopoly or duopoly manufacturers of—for example, the shipbuilders, space launch, went down to one major supplier, fixed-wing aircraft, went down to two, and tank manufacturing, went down to one. 

The policy issues and the contracting issues are different. On the 

emerging sort of category, this is where technology is important, 

access to technological talent. The issue that we have in our schools 

with science and technology is a critical issue. They can’t find 

enough scientists. Export controls are absolutely critical to this category where we are not getting inside the technology because people are afraid to put technology in the U.S. because they can’t get 

it back out again. It has become a serious issue. The lack of venture capital. And even the overall environments for these small 

emerging companies operating in a budgetary environment, frankly, under continuing resolutions [CRs], it is very hard for these 

young companies to sort of enter and come in and do things. 
7 

The other thing that is very important to think about when you 

are thinking about policies relative to these, don’t shut down competition too early. In this part of the segment, you like having 8, 

9, 10 different players, because we are still trying to figure out 

what is the right technology. Think about what the aircraft industry looked like in the 1920s, where it had eight or nine different 

companies. They were making airplanes with three wings, two 

wings, engines in the front and the back. We didn’t know which 

one was the right way. You can think of the UAV [unmanned aerial vehicle] industry today as the same one. The Orville and Wilbur 

Wrights of the 21st century are playing in the new space launch 

markets and the UAVs; shutting off competition too early is actually dangerous; preservation of the science and technology budgets 

is critical for this constituency. 

So the 6163 budget funding to places like DARPA [Defense Advanced Research Projects Agency] are sort of the lubricant or the 

thing that keeps this part of the industrial base vital and alive. In 

the mature part or the core part of the supplier base, these again 

are the Lockheed Martins, the Northrop Grummans, the General 

Dynamics and the Boeings of the world. They represent, frankly, 

the jobs that we have in our districts today, and in many cases, 

they are in some of the most sort of underrepresented areas. And 

their supplier base underneath them sort of represent the mainstay. 

Here this is where the core questions about DOD acquisition 

processes, how difficult is it, how much overhead burdens are we 

putting on them with unneeded processes and others. This is where 

the call for strategy and focus that Mr. Watts and Mr. Downey 

called for is going to be absolutely critical. They can figure their 

way out as long as they know where we are going. Right? And in 

the absence of a strategy, it becomes too easy for some of them to 

sit there and say—just like they did in the 1990s—this is too difficult, I am going to go home, I am going to go somewhere else. A 

great example. 

And we also have to remember that defense is a small market 

for some of these. We went through untold pain related to the 

tanker program, for example, over about 160 airplanes in the end 

that represents about 10 weeks worth of production for Boeing and 

Airbus. 

So keeping that in mind in terms of we deal with that. The legacy one is probably one of the most complex for you because it represents core capabilities, tanks, submarines, aircraft, space launch, 

critical capabilities where we have an advantage, but we are down 

to a very small set of suppliers. And frankly, it sometimes takes 

a lot of money in order to keep that core capability set. And here 

we just need to decide which ones are core capability sets that we 

want to continue, and where we need to put in sufficient engineering and money to sustain engineering talent versus who is the last 

buggy whip manufacturer and actually should go away, because 

they are in more the legacy side of it. 

So from that perspective, the issue of making sure that there is 

enough money to sustain that old legacy set of capabilities until the 

new emerging guys rise becomes one of the most critical questions. 

This is really important for the small suppliers because I think 
8 

where you will find the most amount of vulnerability is in the last 

propeller manufacturer for the U.S. Navy, for example. Or there is 

an example of—it turns out the last maker of linen bags for artillery shells also does habits for nuns. And the nuns decide to pull 

their contract, and now suddenly the U.S. Navy is worried about 

who is going to make the last set of linen bags for the artillery 

shells. 

You are going to find all sorts of strange, bizarre pockets of industry that are actually absolutely critical and important. And so 

from that perspective, the policies that work at one end of the industry don’t work at the other. So as you go through your work, 

which I commend highly, the right sets of questions, think through 

those buckets and the impact that it has across those different 

parts of the industry. Thank you. 

Mr. SHUSTER. Thank you very much. 

[The prepared statement of Mr. Chao can be found in the Appendix on page 61.] 

Mr. SHUSTER. Mr. Chao, could you talk a little a bit more about 

the technology, the emerging companies and the technology, we are 

keeping it out of DOD. We heard in one of our hearings where— 

because of the ITAR regulations, that it is very difficult once you 

have a technology that it is in the open market with our folks providing to DOD can’t sell commercially now, so it really constrains 

them. So what you are suggesting is that people are saying I am 

not even going to start selling to the United States Government because they are going to capture this and I am going to be hamstrung. 

Mr. CHAO. This is one of the thorniest topics on the landscape 

in terms of export control reform. I know this committee and Congress and the Administration have been looking at this topic. We 

have the beginnings of a lot of strange, unintended consequences 

because of the way the policy has been put into place. It has logically been put into place in order to prevent core American technology from leaking out to adversaries. 

It is having the unintended consequences the way it is being implemented where companies are afraid to put the technology into 

the U.S. and are keeping it outside. You are seeing this mostly in 

very cutting edge telecommunication technologies. I am aware of at 

least two instances where global companies have decided to sell off 

their U.S.-related businesses in order to be able to compete globally 

because it was, again, too difficult. 

You are beginning to hear other countries about developing products that are ‘‘ITAR free.’’ And when you talk to those companies— 

and CSIS did a big study on this—these are countries and companies that say we would have gladly bought American had we been 

allowed to. Since we weren’t, we had to build our own set of technologies. 

So we have to figure out a way to reconcile that core need of 

making sure that our core technology doesn’t go out while mitigating some of these unintended consequences. And I would argue 

those unintended consequences are rising at such a level that it is 

getting to crisis levels where addressing this issue, I think, is going 

to be absolutely critical. 
9 

Mr. SHUSTER. And you talked about shutting off competition. 

Where is that occurring and how is that occurring? 

Mr. CHAO. It is not occurring yet. But as we go into a tighter 

budget environment, it is going to become very easy to sit there 

and take a look at that list and say boy, I am running 10 UAV 

competitions or programs, maybe I should just go to one. And all 

I am saying is 10 to 8 is probably okay. Ten to one would be disastrous because we are still trying to figure out that technology, for 

example. And others where the answer is becoming more evident 

just like it occurred with the aircraft industry where we settled on 

a common solution, a single-wing monocoque hull, and others, it is 

okay to narrow down. 

Mr. SHUSTER. Thank you. The Department of Defense just came 

out with a report talking about long-term investments, short-term 

strategically looking at what I think—Mr. Watts, you talked about 

that. But that the report is almost schizophrenic. It talks about 

those things being important, yet it is going to allow the market 

to continue to drive our needs, or to provide for our needs and you 

are saying in your report that we need some kind of strategic plan 

moving forward to keep, like Mr. Chao said, some of our legacy, 

some of our other core competencies, did you see the report at all? 

Mr. WATTS. Yes, I have looked at it. 

Mr. SHUSTER. Your assessment is? 

Mr. WATTS. Well, it seems to continue to assume that this industry operates like consumer electronics or the automobile industry, 

and if that is not the case, then trying to develop a strategy based 

on an incorrect assumption, an incorrect understanding of the nature of what they are trying to manage and develop a strategy for 

is probably not going to succeed. 

Dr. Gansler, going all the way back to 1980, pointed out that because of the acceptance of that assumption, that incorrect assumption that it is a normal free market and competition will really 

work the same as it does in consumer electronics or flat-screen 

TVs, the policies, based on that assumption, have generally done 

more harm than good. So now in fairness to that report, they did 

talk about the service aspects of defense acquisition as opposed to 

major weapons systems. And the use of competition may be more 

useful in the services in the defense procurement. 

So there is a point to be made there in terms of the way they 

structured the report. But still, the assumption about the nature 

of the industry just, as far as I can tell, has been wrong since the 

1950s. 

Mr. SHUSTER. Mr. Downey, you concur with that, for the most 

part, from the sounds of your testimony? 

Mr. DOWNEY. Yeah. I do entirely. I think competition certainly 

ought to be used for those sectors of the industry where it may be 

effective. Electronics is a key area. But there is not going to be 

much competition for a nuclear submarine or a long-range bomber. 

There just aren’t enough companies in the market. So you can’t 

have classic competition in some core capabilities. And I think the 

challenge for the Pentagon is to understand the difference and construct a strategy that is adequate to deal with the differences, as 

Pierre [Mr. Chao] has said. 
10 

Mr. SHUSTER. And I fully intend—at some point, we will have 

the folks from the DOD in front of us to ask why they believe that 

this can be a market driven to provide us with all when it is clear 

when most people look at it—when you look at it as with common 

sense, that DOD is the regulator, the procurer, there is just one 

U.S. Department of Defense. Why do you think, in their minds, are 

they just kicking the can down the road, because we have got fiscal 

financial restraints? 

Mr. WATTS. I am just puzzled by why that has persisted as long 

as it has, is all I can say. It seems to be a myth at best. Perhaps 

it is just—you know, we look at the really normal market commercial parts of our industry. We think competition and innovation are 

very important, and we just sort of assume that it is pretty much 

the same in the defense industry on the one hand. On the other 

hand, if you look at down select from an RFP [request for proposal] 

to move into development of a program, most of the competition 

ends at that point, notwithstanding, essentially, the direction in 

law from that 2009 Reform Act which suggested that the Secretary 

of Defense should try to maintain competition throughout the life 

of programs. It just hasn’t been happening. And the best example 

is the second engine for the Joint Strike Fighter. 

If you go back and review the reasons that Secretary Gates gave 

for not going ahead with that, it was basically the tradeoff between 

the real upfront of $2.7 billion or so of real cost to develop the engine, and the more theoretical benefits of the long term—you know, 

actually being able to compete two engines over the lifespan of that 

airplane, which they judged as more theoretical and ephemeral and 

didn’t think it was worth the $2.7 billion. 

Mr. DOWNEY. Mr. Chairman, if I might add, I think part of the 

answer to your question is simply not watching what is happening 

to the market in general. In the 1950s and 1960s, when we were 

designing 10 aircraft and producing 6, competition made sense. 

When you have a market of only one or two actual producers today 

and no real prospect in a very capital intensive sector of attracting 

new competitors into the market, then you have to look at something different. And that is a hard thing to do. It is much easier 

simply to assume that competition will give you the innovation and 

go forward. 

Mr. CHAO. I would also submit to you, again, it is the difference 

between these different segments. So when the Pentagon writes 

that report, they are looking at some of the emerging technologies. 

If you were to put an RFP out today and say I need a cyber solution, or I want to put a PDA [personal digital assistant] in every 

soldier’s hand, I guarantee you are going to get a lot of competition, 

a lot of people will show up. That is not who they are representing, 

that is not who they are talking to. To sit there and say I want 

competition in tank manufacturing is silly. We haven’t designed a 

new one. I have got a very good supplier. I am down to one. And 

I would be wasting money. That is more of a negotiated relationship as opposed to where you can have an open arm’s length relationship—and again, services, newer technologies, that works fine. 

And that is where, I think, you have also the schizophrenia of the 

report, because they are talking about that part of the industry, I 

would suspect that—most of the people you are talking about the 
11 

pain that is going on inside the defense industry is from the more 

legacy part of the industry that is down to that narrow base. 

Mr. SHUSTER. Thank you. Mr. Larsen. 

Mr. LARSEN. Thank you, Mr. Chairman. Just an observation in 

the first 8 to 10 years of this decade when there seemed to be relative plenty to the defense budget, we were getting the same complaints. So fiscal restraint is here and coming and we have the 

same complaints. Sort of gets to Mr. Watts’ point. I wasn’t here in 

the 1950s, but I will take your word for it, that the complaints 

were the same. As always, there is always never enough money 

and there is always plenty of bad ideas being brought to the Government for funding, as well as good ideas. And our goal here is 

to be sure the good ideas, no matter where they come from, get a 

hearing to increase the opportunities for warfighters to get the 

products and services and support that they need. 

One example—and I think this is interesting—I guess, I would 

ask Mr. Chao, Mr. Downey. This question has to do with satellites. 

There is a new entrant in the market who is seeking to become a 

competitor in the defense side of the business. So—but the core 

part, as you would describe it, the core part of the industry, either—well, I won’t say that they don’t want that competitor, but 

the rules are set up to encourage to support the core part of the 

industry, and to seemingly discourage the new entrant. This has to 

do with the SpaceX versus the Boeing on the satellite side. 

So how do we bridge that? How do we bridge that problem as an 

example? I didn’t come here to talk about this in particular. But 

it is a perfect example of where you have a new emerging entrant 

who actually wants to now jump the gap to become a competitor 

in a larger program. 

Mr. CHAO. That is a great example. You can take those, and 

again, you can pit the classic aircraft manufacturers against the 

UAV manufacturers, the light vehicle—I mean, each one of these 

sectors has players in each place. Part of it is driven by the policy 

and the technological solutions that the Pentagon wants to go after. 

If the core way that we are going to do our satellites is large, sort 

of monolith, multibillion dollar satellites that have capabilities, it 

is going to be very hard to give that to a small startup, and it 

would drift itself towards there. 

A policy suggestion or things that some people have suggested is 

that while you are keeping that core legacy, ensuring that there is 

a certain amount of money preserved for the technological innovation amongst the younger ones is money worth spending as the 

hedge, and in order to usher along some of these newer technologies. In markets where there is a large commercial market, the 

commercial market will do that for the Pentagon. 

In places where it is a little harder and there isn’t a big market, 

space, you happened to pick one, would sit there and say that it 

is probably too early to hand it over to that young startup, so I 

want to keep my core. But on the other hand, you are probably 

going to want to usher along some of these new guys to see what 

the new technology is. 

Mr. LARSEN. Mr. Downey. 

Mr. DOWNEY. I think it is a great question, and we are going to 

have to figure out how to integrate new innovative ways of building 
12 

capabilities that we have built before. But in general, a great idea 

isn’t a capability. A capability is the ability to design, develop, 

produce, and support a system throughout its life cycle and to build 

the skilled workforce that can do those things. 

Our policies today are to buy fewer and fewer pieces of equipment, have fewer programs with far more time between new program starts. It is very, very difficult to sustain that life-cycle capability in that kind of environment. Most small companies don’t 

have the staying power or the resources to be able to do that. So 

having a one-time capability to compete for one thing doesn’t necessarily mean you sustain the capability in terms of a unique military capability. 

Mr. LARSEN. But that is one of the challenges facing the smaller 

companies in general, that longer lead time. So again, it is a process that plays against them as opposed to encouraging newer entrants into even the smaller niche areas of the defense budget, and 

something that we heard from folks and certainly in my district 

and from other places as well. So I think accepting that as a reality 

is part of what we don’t want to do here. We want to accept that 

as a challenge for the Pentagon to change as a way to encourage 

smaller and medium-sized businesses. Maybe we can help define 

what is an appropriate market and what is not an appropriate 

market too, and help them along. We will hear from folks next 

week on this point. 

The point you made about the aerospace defense industrial base 

today is not the one of the past but that we need budgets that 

produce programs that are profitable and stable—I don’t want to 

put words in your mouth. I think from your members’ point of view 

and from the current market’s point of view, clearly, stable contracts that help provide a profit to the business is a good idea from 

your side of things, and probably the number one priority, despite 

the brochures; our number one priority is the warfighter and making sure they get the services and products and things so they can 

do the things we are asking them to do. Where those match, it is 

a great idea. Where they don’t match, I would rather see us prevail. I would rather see the Pentagon prevail so that we are getting 

the services first. But if we do that, then that may not help you 

all prevail. So trying to find the sweet spot where you are coming— 

folks are coming and saying we need programs that are profitable, 

frankly, we have to say, well, we want programs that work, and 

they work on time and you are responsible for that, too. 

Mr. DOWNEY. Well, I don’t think there is any difference in what 

we are saying at all. If you have a strategy, you know where you 

are going, you have predictability and stability, and you have a 

reasonable way to do strategic business planning that satisfies your 

shareholders. 

And we have to remember that the members of the aerospace 

and defense industrial base are largely private companies. They 

are not government companies. If they don’t meet the expectations 

of return on investment—and here is an expert on that—then their 

boards are going to force them into more profitable areas. 

So the more predictability and stability you have, the better opportunity to calculate that critical return on investment, and the 

stability allows you to build those things that work, that are on 
13 

time, and that are on the contracted price. The more instability you 

have, we would say, the less likelihood that you are going to get 

an era where you don’t see cost increases and schedule slippages. 

We have got to get to the point where we have that understanding 

of what is wanted, when it is wanted and it isn’t changed on an 

annual basis, or when a chief of service or a new administration 

turns a critical must-have into a nice-to-have but expendable. 

Mr. LARSEN. The other challenge, if I may, Mr. Chairman, a challenge we all obviously face and we have heard from other folks is 

the—another solution is the board decides to go out and purchase 

that smaller company, right? They go out and purchase the capability and bring it in-house themselves, which is a challenge we 

have heard from other folks, is how do we maintain—how do we 

help maintain the incentive structure so that the independence and 

smallness and innovation side of these small- and medium-sized 

businesses stays independent and innovative as opposed to getting 

sucked in to become a division or subsidiary of a company? 

Mr. CHAO. That has partly been driven by the lack of visibility 

in the market space. Right? The large companies have cut independent research and development down from about 5 percent of 

their revenues to about 11⁄2 percent, and they have been substituting M&A [mergers and acquisitions] for that research and development because in the absence of knowing where the building 

wants to go, the only thing they can do is watch that little guy succeed, and at least they know that, hey, they are buying from that 

guy, so I will pull him in. 

The other thing about the profitability—just one quick point 

there. This is the only market space where the customer would 

gladly pay a billion dollars at 8 percent margin rather than $500 

million at 20 percent margins. It is completely turned around. And 

that mentality sort of creates a lot of I think these perverse sort 

of disincentives for innovation, new entrants, et cetera. So as you 

hear proposals for, you know, reforming the system, just be very 

careful in watching about the assaults on the profit, which I can 

understand from a political standpoint, is actually going to end up 

generating the exact opposite. The industry would gladly trade 

lower dollars for higher profits each time. But for some reason, that 

is not in the mix. 

Mr. LARSEN. Thank you, Mr. Chairman. 

Mr. SHUSTER. Mr. Runyan. 

Mr. RUNYAN. Thank you, Mr. Chairman. And, gentlemen, thank 

you for coming and your testimony. I just really have one question. 

We talk about the industrial base in this country, how it is—frankly how I look at it is the last major form of industry that we have 

here that is solely done here, and how we keep that, and Mr. Downey you have said obviously we need to have some confidence in 

projection forward in how we can procure stuff like this. My one 

thing, and I don’t think—I don’t think it gets enough traction, and 

I think it is really directly linked is the turn we have actually 

taken in space exploration associating with defense. Can you kind 

of talk—because I know there is a lot of one offices and small suppliers that are involved in that industry. Can you kind of touch on 

that a little bit? 
14 

Mr. DOWNEY. We are concerned about the space industrial base, 

especially as it relates to the national defense space industrial 

base. There is some good news. There is an emergence of commercial space companies. Some of them are, in fact, members, and we 

look for great things from them. But I would make the same case. 

Space is an expensive proposition. The return on investment right 

now is somewhat problematic, and we need the Government strategy that keeps us moving forward on the cutting edge of technology. 

There have been many who have said they would bet you a lot 

that the next boots on the moon are going to be Chinese. And I am 

not sure that they are wrong. And only the Government, only 

NASA [National Aeronautics and Space Administration] and the 

Pentagon can have the kind of vision that translates into programs 

that builds the capabilities, and then as the commercial companies 

build their capabilities, I think they will be serious members of the 

United States space industrial base. 

But we risk losing some critical parts. We don’t have a heavylift capability. Our satellite capability is atrophying, and everybody 

knows what the situation is with our manned space program. Right 

now, you know, we are dependent on the Russians to get to the 

space station. And the capability will atrophy. It will. And the 

small companies that make up the supplier base won’t have the 

majors to sell to. They will turn to something else and then we will 

have to start again. 

Mr. RUNYAN. And I think even looking forward and planning— 

and we hear it—testimony all the time, that even when the DOD 

tries to project what is going to happen in a QDR [Quadrennial Defense Review], that changes tomorrow. So—in a way it is kind of 

an oxymoron to go back and forth. We are planning for the future, 

but the future changed yesterday after we already put the report 

out. So I understand the frustrating aspect of it. But to help us nail 

down a way to keep the industrial base here I know is a frustrating 

proposition. So thank you. And I yield back, Chairman. 

Mr. SHUSTER. Thank you, Mr. Runyan. Ms. Hanabusa, you are 

next. 

Ms. HANABUSA. Thank you, Mr. Chairman. And I would like to 

thank the chair and the ranking member for taking us to Rock Island. It was a very interesting adventure for someone from Hawaii 

to actually see a working foundry. I think I would like to start first 

with Mr. Downey. Mr. Downey, I was reviewing your publication, 

‘‘Defense Investment, Finding the Right Balance.’’ And you say 

things like how much is enough, which is an interesting concept of 

how much is enough. But I think the problem that I see that we 

are having is the fact that when we talk about the defense industrial base, right, some of us think about things like R&D [research 

and development], because we know that the Big 7 or the Big 5, 

as you say, in 1993, 30 companies went down to 5 in essence. And 

then we forget that the other component of it is truly an industrial 

base, in other words like the foundry, who then manufactures. But 

then we have this conflict of how do we decide what is going to be 

manufactured because of what we are developing and, it comes 

down to really a sense of what is, from our perspective, the defense 
15 

going to look like, or the military is going to look like into the future? And I know each of you have your different areas. 

So can you tell me each one of you, beginning with Mr. Downey, 

you can go to Mr. Chao and Mr. Watts afterwards—what is that 

fundamental end goal that we are looking at, you might call it end 

strength, I am talking about people. What is that end goal we are 

looking? Let us take it 10 years out, to 2021. What are we planning 

for? Because until we have a clear view of that, how can we then 

decide enough is enough or when is enough enough? Is 4.4 percent 

of GDP [gross domestic product] enough? And how do we spend 

that money? And how do we keep the industrial base, which is 

manufacturing and the research and development when we go from 

30 to 5? 

Mr. DOWNEY. Ms. Hanabusa, I think there are—I detect this as 

two parts. One is that we do need a strategy to decide what we 

want our military to do in the future, what forces we need to do 

it, and what technologies and weapons we want to provide them to 

do it. That is frankly supposed to be the job of the QDR. It has not 

done a terrific job there. So that is about getting down to what specifically we are going to do and what we need. The report you 

talked about was one where we looked at the issue from a macro 

level, and said the United States since mid-20th century has been 

a global power with global responsibilities and global reach that we 

have ended with up a military of a relative size of 1.5 million active. And when we looked at the budgets over time, and the ups 

and downs of the budgets, what we found was that in order to have 

that global military with global reach and global responsibilities, 

every time we came down much below 4 percent of GDP, and at 

the same time, reduced the investment accounts to below—much 

below 35 percent of that top line, we ended with up a hollow force, 

whatever the specific goals, whatever the specific forces were. 

And so I think it is back to a point I made earlier. You have to 

make these choices, but you have to have adequate resources. And 

so we started with the assumption that the United States is going 

to remain a global power with a global force, with global responsibilities, and we looked at the—an interesting point too, that increasingly, that 1.5 million looks smaller and smaller to do all of 

those things. 

So we have had a historical policy of using the technology advantage we have had. And so the amount of money that it takes to 

field one of those 1.5 million is going to keep increasing in the future. You are not going to reduce that requirement. So number one, 

we do need to know where we are going. That is a national-level 

political decision. We need to know how we are going to do it militarily. That is ultimately a professional military recommendation 

with the national political decision. But it is going to need the resources. And we believe, at AIA, that those resources are probably 

not going to fall much below 4 percent of GDP or 35 percent of that 

top line for investment, whatever those decisions are, or those 

plans are going to end up being hollowed out in one way or another. And the resourcing part is a congressional responsibility and 

decision. 

Ms. HANABUSA. Mr. Chair, I am out of time. So could the other 

gentlemen send it in writing to me? Thank you very much. 
16 

[The information referred to can be found in the Appendix on 

page 111.] 

Mr. SHUSTER. Sure. And with that, Mr. West. And also let me 

mention, Members, we will probably go for another round if you 

have any more questions. Because I know I have a couple more. 

Mr. WEST. Thank you, Mr. Chairman, and to the ranking member and thanks to the panel for being here. And I spent a couple 

of days in the military. And a lot of the frustrations I saw, especially when you look at the FCS [Future Combat Systems] program, Crusader, F–22, Advanced Amphibious Assault Vehicle. In 

the last 20 years, we have gone from 546 Navy war vessels down 

to 285, but yet, 10 years ago about 19 guys got together. We spend 

$1.5 million on a Tomahawk Cruise Missile. They hijack four airplanes and they flew them into buildings. 

We have programs like the JTRS [Joint Tactical Radio System] 

and the WIN–T [Warfighter Information Network-Tactical], which 

the Army is saying that is one of their top requirements for communications, but yet we are not funding it. 

I would like to ask this question, your assessment: Do you really 

believe that there is a huge disconnect between a national security 

strategy, national military strategy and then, of course, the requirements we send out to the defense industrial base so that we 

can start developing a sensing of the next 20, to 30, to maybe 40 

years, of this military that we have to have to be able to fight 

against, you know, what is a very determined enemy that is not 

that much technologically advanced. So I would like to hear your 

assessment on that. And then what can we do to rectify that situation? 

Mr. WATTS. All right, I will take a stab at that one. 

Look, let me just mention one very broad capability that we have 

had really since the Second World War, and that is overseas power 

projection of conventional forces. Associated with that, one of the 

pieces that we have developed certainly over the last couple decades has been long-range precision strike, and frankly since Desert 

Storm, we have had almost a monopoly in that area. Now, one of 

the problems going forward is that technology is starting to proliferate, at least at the short end range, guided mortars, guided artillery, guided short-range missiles, and that is going to make 

power projection much more difficult for us if you think in terms 

of, say, something like Inchon in 1950, a traditional over-the-beach 

amphibious assault. So that would suggest we are going to have to 

make some substantial changes and adjustments. 

I would be hard-pressed to think that we would like to get out 

of the precision strike business. I think that is going to be—that 

is an area which is fundamentally dependent on networking, on 

ISR [intelligence, surveillance, and reconnaissance] advanced capabilities that we have spent a lot of money and time and effort developing, and in a broad sense you wouldn’t want to back out of 

that particular business long term. Given the fact that the Chinese, 

for example, are going fairly fast down the same path in developing 

anti-access/area-denial capabilities against, say, surface combatant 

and aircraft carrier, reaching out to ranges as far away from the 

Chinese coast as Guam, suggests that the future of the carrier battle group may be at risk. We have depended on that for overseas 
17 

presence and power projection for a long time. Those are hard 

choices that I think the services are going to have to make, so let 

me just mention that as one. 

I mean, another area that I know is not conventional, but to 

think about where our nuclear capabilities have gone since the cold 

war ended, it would be nice if we could get, in my lifetime, to a 

world without nuclear weapons. I am personally fairly skeptical. I 

don’t think we have convinced too many others around the planet 

who possess nuclear weapons that it is time to give them up and 

that they no longer have value, and that is an area of the industrial base where we have preserved the design capabilities at Lawrence Livermore and Los Alamos, which as I am sure you are 

aware Secretary Gates and Secretary Bodman, who was at [the Department of] Energy going back in 2009, basically observed we no 

longer have production capabilities for a nuclear weapon, and that 

is an area where if you really wanted to go back into that business, 

you would have to start over again. 

Mr. CHAO. One quick comment. As long as we have a requirements and acquisition system that takes 20, 25 years to get something from concept to actually out in the field, you are going to 

have always a fundamental disconnect between strategy and what 

we are buying. I mean, in 1900 they were planning against the war 

against, you know, the Germans or the French or the Brits potentially, by 1920, right, we had just fought the Germans, by 1940 

fighting them again, by 1960 it is the Russians, by 1980 they are 

at the top, by 2000 it is four guys in an airplane, by 2020, to your 

question, Ms. Hanabusa, I mean, who knows? And so shrinking, 

looking at the, again in terms of your reform efforts, looking at 

shortening that cycle can only be a good thing from the perspective 

of getting that mismatch out of the way, and oh, by the way, shorter cycle, which means more points of competition, more programs 

is very healthy for an industry. One program every 20 years is 

really unhealthy for an industry. 

Mr. SHUSTER. Would you repeat the last thing you said? I 

couldn’t hear it. Just the last couple sentences. 

Mr. CHAO. One program, if I am running one program for 20 

years, that is very unhealthy for an industry versus, you know, 

versus not. I mean, this whole element of how long it takes us to 

get a weapons system is really one of these core root cause elements, and we solved part of that problem in the way we did acquisition for the war because it created a really quick pull, and we had 

very quick turns, right? And so we will have a healthy base related 

to that. It is the other part of the system which you guys are looking at from a reform standpoint, I think that is part of the fundamental issue. 

Mr. DOWNEY. Quick comment, Mr. West. I think, as an old soldier myself, I sympathize with your frustrations, I had them as 

well. One thing that personally I would be leery to do is predict too 

precisely who we are going to fight, where we are going to fight, 

with what we are going to fight, and when we are going to do it. 

Historically we have always been wrong when we have done that 

too much. So part of the problem, I think, is retaining the capability we need. We are not going to end up buying everything that 

is wanted or designed, but when the system gets to the point that 
18 

you described, the possibility is we won’t buy much of anything, as 

Pierre said, and the capability to do that will atrophy and migrate 

away, and we are just not going to be able to reconstitute some of 

that. Some of it will be very expensive, some of it may not be recoverable at all. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Mr. SHUSTER. Thank you. Ms. Sutton. 

Ms. SUTTON. Thank you, Mr. Chairman. Thank you for your 

leadership, and to the ranking member, thank you as well. Gentlemen, thank you for your testimony. I have great concern, as I am 

sure everyone here does, of the consequences of the atrophy that 

you describe. I tend to believe that if you can’t make it, you are 

at the mercy of those who can, which is not a good place for the 

United States of America to be. This is so, so very, very important. 

Mr. Downey, on page 5 of your testimony you talk about other 

nations, including our closest allies, comprehend these realities, 

and thus they have adopted systematic comprehensive policies to 

sustain what they consider to be strategic national assets. Can you 

expand on that for me, tell me who and what? 

Mr. DOWNEY. Yeah. Most major industrial nations do have an industrial base strategy for their defense. I wouldn’t go so far as to 

say it is exceedingly successful and effective in all cases, but 

France does, United Kingdom does, Germany does, I believe China 

does, but the key that they tend to focus on is what capabilities 

from a national standpoint they want to retain. They don’t always 

get it right, but at least it is part of their process. 

The British have the process of the defense white paper system, 

which includes defense white papers. We do not include industrial 

base considerations in our strategic planning historically. In the 

most recent QDR there was exactly one paragraph about industrial 

base, and nobody in the industrial base that I am aware of participated in even developing that one paragraph, let alone a strategy. 

Yet I sat in a meeting in London a couple of years ago where the 

then British Defense Minister met with the senior leaders of the 

British defense industry and outlined where he was going to go, 

saying that he had heard their concerns and that he was going to 

take care of part of that by including in the strategy an effective 

outreach program for foreign sales. Now, that may not be a complete strategy, but it is at least a somewhat coherent one, and one 

which we don’t have as a coherent one. 

Ms. SUTTON. Well, I appreciate your answer. There are so many 

questions. Let me ask you this: I mean, clearly I think that maintaining a stable and strong and nimble industrial policy is critically 

important. You talked about the need for the strategic plan. I think 

the second component that you really focused in on was communication, and if you could just speak to the need for much better 

communication and coordination between the Pentagon and industry than has been our historical norm, in a nutshell, what do we 

do? 

Mr. DOWNEY. Yeah, in a nutshell, as I said, historically we 

haven’t done much of it for almost a 10-year period. During the 

first decade, to my knowledge, there wasn’t one meeting between 

the Secretary of Defense and the collective leaders of the U.S. aerospace and defense industry. That has been turned around. Former 
19 

Secretary Gates and current Secretary Panetta has begun to meet 

with the leaders of the aerospace and defense industry, and the industry has reciprocated by forming an industrial base task force to 

look at the impacts with the hope that we can help the Pentagon 

if they so choose, but it is—even if they develop an industrial base 

strategy, if they do it without industry, it would be like having a 

naval strategy without talking to the Chief of Naval Operations. 

Ms. SUTTON. Well, the one question I have, as you talk about 

the—even if all of those improvements take place, if we make 

progress there, we still have the issue that this panel has seen over 

and over again dealing with the communication into smaller and 

midsize providers, so can you speak to that issue as well? Because 

when you say industry, I am guessing you are not talking about 

them, you are talking about—— 

Mr. DOWNEY. No—— 

Ms. SUTTON. You are talking about—— 

Mr. DOWNEY. I am. And as a matter of fact, in our association, 

for example, we have a supplier management council that includes 

members of the supply base and that is represented on our executive committee by one of their leaders, currently Chuck Gray from 

a small company. So their considerations are included in all of the 

work that we do and all of the advocacy we do with the Pentagon 

and elsewhere. 

Mr. SHUSTER. If you have further questions, we will start the 

second round with you right now. 

Ms. SUTTON. That would be great. 

Mr. SHUSTER. Sure. 

Ms. SUTTON. Thank you very much, Mr. Chairman. When you 

talk about the—you specifically mentioned some capabilities that 

you see atrophying from the heavy-lift capability, the satellite capability, and the manned space capabilities. Part of the challenge I 

face and maybe others do is how do you quantify what that means 

to us? 

Mr. DOWNEY. Well, we are working on trying to get a better handle on the impacts. One thing we do know, the first part of that 

life cycle that begins to atrophy is the design capability. As a program matures, the company who is making the product has less 

and less need for the people who do design, and so if they don’t 

have other places to put them or other programs that require design, then they are going to get rid of them, and there are a number of design teams that have been reduced or that have actually 

been disbanded because there is no work for them, and it goes back 

to which ones do we not want to have that happen to. I would probably suggest that right now we wouldn’t want to lose our capability 

to design a nuclear submarine. The British went down that road 

and found they couldn’t reconstitute that capability, and about a 

dozen years later they decided they needed it. And so I would hope 

the Pentagon is looking at that much more carefully to decide 

which of those capabilities and which of the skills represented by 

the people that may be lost if the budget is decremented too much 

they absolutely have to have and then come up with plans to do 

it, and in some cases that may not seem the most cost-effective 

thing, program by program, but on a national security basis it 

might be the most cost-effective thing to do. 
20 

Ms. SUTTON. Well, I share the frustration over the idea that 

every expenditure—it is interesting what we are seeing in budgeting here, that anything that doesn’t appear as an expenditure is 

obviously an efficiency, and that isn’t necessarily the truth, and so 

this whole concept of life cycles and the cost of not investing, the 

cost of not doing things, and I think that that is what we really 

need to help translate in order to get some more sense back into 

the way we are proceeding, not just in this, you know, in the industrial base and certainly DOD, but frankly infrastructure, the cost 

of not building infrastructure is not zero. It is still there, and it is 

going to maybe be more costly and more inefficient. So anybody 

else have any comment? 

Mr. CHAO. I am just going to make a comment to your question, 

in the absence of a defense industrial strategy, we are actually 

making one up by every acquisition decision we make. 

Ms. SUTTON. Exactly. 

Mr. CHAO. It is getting done, so we should stop lying to ourselves 

and admit that we are doing it and get to it. Because also in the 

absence of that strategy, and I will say something incendiary that 

will probably get me into trouble, but, you know, in the absence of 

figuring out what is strategically important to us, we focus on very 

strange things, so I have a very detailed industrial base strategy 

related to black berets, but I don’t have one related to semiconductors. 

Ms. SUTTON. Right. 

Mr. CHAO. And the Chinese have set up a policy where they are 

drawing in every technology where it would almost be fiduciarily 

irresponsible for an executive not to put their plant into China, 

right, because of the incentives they set up, and we are letting it 

drift away. And so I think you are hitting on exactly the right point 

about what is strategically important, and if we don’t get to it, we 

are going to find out that that capability is gone. 

Mr. WATTS. If I could just add to that, in the kind of fiscal environment that the Pentagon faces now and the Department of 

Homeland Security and other parts of the U.S. Government, the 

tendency is to start focusing on individual programs and sort of addressing the question of, well, how much can I cut this one, can I 

eliminate that one? And it seems to me from a strategic standpoint, 

you first want to decide what you really want to keep, and we 

haven’t been doing very well at that. 

Just to touch on the point that Mr. West mentioned earlier, if 

you look at the last three or four or five national security strategy 

documents, they tend fundamentally, in my judgment, to be wish 

lists without getting on to the difficult issues of exactly how are we 

going to get from point A to point C or point D, and so I think they 

have not been that helpful in addressing these kinds of issues 

about what we want to keep. 

Ms. SUTTON. Thank you. 

Mr. SHUSTER. Thank you. Mr. West. 

Mr. WEST. Thank you, Mr. Chairman. Coming back to what we 

talked about with the acquisition cycles, you know, one of the 

things that I know that the Army has instituted is something 

called the Rapid Equipping Force. A good buddy of mine is heading 

that up. So what are your recommendations, things that we can 
21 

look at, things that we could do, things that we could push for coming from this panel and from the Armed Services Committee as far 

as how do we shorten that acquisition cycle and how do we get 

more of these emerging technologies and companies involved so 

that we can be a bit more adaptive because the soldiers, sailors, 

airmen, marines are quite adaptive on the battlefield, but it seems 

that we up here on this aspect and in industry, we are not as 

quickly responding and as adaptive. 

Mr. CHAO. You hit a great topic. We have painfully learned those 

lessons over the last decade. One of the biggest things I think you 

need to watch as a group is the tendency that once we are gone 

to have forgotten those lessons. In fact, 200 years of history says 

we will forget those lessons and go back to our old habits, and so 

one of the key things we can do is how do you embed those hard 

lessons learned into the system and do that? Because there is a 

basic presumption that in some ways there is a barbell-shaped 

market. One part of the market or of the industry that is tied to 

this fight of today, very rapid acquisition, leveraging commercial 

technologies, I am fighting against guys with box cutters and 

spending $10 million developing a device is not a smart thing. The 

troops know how to do that. 

There is the other end where it is near-peer adversary and I do 

need these traditional players to do that, how can I get them to 

move a little bit faster and cross-pollinate? Again, don’t extend the 

lessons too far in either direction, but the number one thing I think 

we can do is make sure that the mentality that is adopted there 

gets shifted into the core process where appropriate, particularly 

related to some of these new technologies where you need the fast 

turns. Think of how obsolete the technology is inside some of those 

long 25-year platforms we just talked about. 

Mr. DOWNEY. I am not sure there is a whole lot of new ideas on 

that. Most of them have been identified and articulated, number 

one, decide what we want, lock down the requirement, and build 

to the requirement, preferably do that with some cooperation between those who need it and those who are going to build it, and 

reduce the impediments to building it and doing it quickly and 

without excessive cost, and we know what a lot of those are; excessive oversight, excessive paperwork, excessive and nonmaterial audits. I had one of our CEOs [chief executive officers] that told me 

that he had a program that had ended over 3 years before. The 

auditors showed up, three people—— 

Mr. SHUSTER. Mr. Downey, would you suspend for a second. I 

have a little difficulty here. I don’t want to miss what you are saying. 

Mr. DOWNEY. Sorry, Mr. Chairman. That he had a program with 

the Pentagon that had been completed about 3 years before. There 

were only a handful of people who were actually on that program, 

and the auditors showed up. There were actually more auditors 

than had ever worked on the program, and he had to go out and 

hire some accounting people on the back end. Now that is cost, you 

know, and that is going back in the system. So Ben Rich, who was 

the head of the fabled ‘‘Skunk Works,’’ pointed out in his book that 

over his tenure the oversight and paperwork had increased to the 

point that in his words we put more and more into the big end to 
22 

the final to get less and less out the small end, and it just got 

worse and worse, and he wrote that in 1994, so you can imagine 

what it is like at this point. 

Mr. WATTS. Back in 2006 General Kadish, when he retired, did 

an acquisition assessment, and one of the recommendations in that 

report was something called ‘‘time-certain acquisition’’ where you 

set a 4- or 5-year hard [stop], you either deliver the product by 

then or the program is canceled kind of an approach. I understand 

that when they did the outside look at the last QDR, General Larry 

Welch was involved in that. He has a lot of acquisition experience, 

and essentially made the same recommendation. You will find it in 

Gansler’s book, you will find it in our report. The caveat that goes 

with that, of course, is you have to ruthlessly adhere to the timecertain delivery schedules and not sit there towards the end of the 

program as it is starting to slip in terms of schedule, and cost is 

going up, and decide, well, we spent all that money, so we can’t afford to actually cut it off. That is a very difficult thing, as I am 

sure all of you know in terms of listening to industry constituents 

from your States. 

Lastly, I will just mention, you know, to touch on what Fred 

talked about, about the oversight, I recently talked to some people 

from one of the major contractors where they had a product—it had 

originally been built for one of the services, and now they were 

starting to sell commercial versions of it, and the difference in oversight at government contractor oversight of the program actually in 

the factory was the difference between 5 or 6 on the commercial 

side and 100-plus on the government side, and as Fred correctly 

said, that is cost. There is just no doubt about it. It also makes 

schedules slip. 

Mr. WEST. Thank you, Mr. Chairman. I yield back. 

Mr. SHUSTER. Thank you. Ms. Hanabusa. 

Ms. HANABUSA. Thank you, Mr. Chair. Mr. Chao—and by the 

way, gentlemen, I still want your writing to my last line of questions, I want it in writing your responses. 

But Mr. Chao, let’s move on. I like your concept of policy by acquisition. I think that is a great way of putting it, and that is probably what we are doing. I also went over your sort of your slide 

show, and what caught my eye was, of course, the second page that 

says a few ways to think of industrial policy affairs. One of the 

things in here that causes me somewhat concern, and I would like 

to go over it with you, you talk about the life cycle of technology 

industry sectors, and it is this curve that ends up with stability decline, and you have all these other things on the bottom, and it basically points to fewer competition, and that is really the purpose 

of, I think, this committee. We were looking at as we began to look 

at the cuts in the defense budget, we were actually more concentrating on small and medium-sized businesses because the big guys 

will, as your chart in here shows, they practically have everything 

else. But this is troubling to me because what you seem to be saying is that we are just headed for fewer competitors and we are 

headed for some kind of decline. Am I reading your chart correctly? 

Mr. CHAO. You are from a technological standpoint to the extent 

that every industry runs through its normal cycle, and the commercial industry runs through it much faster, and the cycle gets re-
23 

started. There is a part of the curve that reboots the cycle, and so 

if you want to be harsh about it, the technologies we are most 

stressed about—aircraft, space launch, shipbuilding—those are 

technologies of the 1910s, 1920s, right? Now, the difference between the commercial world and defense is actually we still use 

those technologies. So that decline phase goes on for a very long 

period, which is why—or I would call it stability in terms of maturity of technology, and so all it says is that the policies and things 

you want to focus in on are different. That is going to be a negotiated relationship with that because of the age of those technologies there will naturally be fewer competitors, period, full stop. 

Ms. HANABUSA. But if we put the policy by acquisition and overlay that—— 

Mr. CHAO. Right. 

Ms. HANABUSA. We also seem to be saying that because we are 

continuing maintaining those old technologies of 1910 of which, as 

you are saying, we may put a new coat of paint or we may beef 

it up a little bit, but we are seemingly then doing what you are 

kind of guarding or telling us to guard against, which is we are 

maintaining the old technologies because we, by doing that, we are 

making, we are setting the policy through our acquisitions. 

Mr. CHAO. And in some cases you should because they are still 

very valid technologies. So to date no one has yet sort of come up 

with a substitute for the submarine, right? 

Ms. HANABUSA. Right. 

Mr. CHAO. And so it is a core capability set. No one has come 

up with a substitute for, again, the heavy space launch. You have 

some guys who are trying to do that. And that is why I think as 

you look at this, and to Mr. Downey’s point and Mr. Watts’ point, 

you know, it is where you should be spending your time because 

it is going to be the thorniest problems of how do I keep these capabilities alive while at the same time you should be spending R&D 

money. We should be encouraging the young innovators to see who 

is going to come up with an answer for that because I guarantee 

you something, if we don’t, the adversaries will. They don’t have 

$700 billion to spend on sustaining that base. They are trying to 

solve the exact same problem at one-tenth the cost and, guess 

what? That forces them to be really innovative, which is why they 

come up with box cutters or they come up with drones or others. 

Ms. HANABUSA. While I still have you, the barbell, which is what 

you were mentioning I think in relationship to Congressman West, 

you have it also in your handout. I am trying to understand slice 

one and slice two, and if you can do that very quickly for me. 

Mr. CHAO. Yeah, it is just two different ways of looking at it. So 

one way is to think about it from the dynamics of the left-hand side 

of the barbell which is tied to the fight of today. It is very much 

again pulling technologies off the shelf, think of the MRAP [Mine 

Resistant Ambush Protected vehicle], think of those technologies. 

In fact, back to the ITAR issue, three or four of the five designs 

were overseas designs, right? That was able to pull the more traditional side of it is our old stately system of acquisition that we 

know and love and sort of, you know, moves along. That is one way 

of thinking about it. 
24 

The other way of thinking about it also is from the types of companies. The smaller, younger, more innovative ones are the ones 

that we have found that have been taking advantage of [the] rapid 

acquisition system. I am not going to give the creation of the building of FCS or the GIG [Global Information Grid] or large networks 

or F–22 to a small start-up. It is just not the right scale and appropriateness. So you need both ends. 

The biggest dilemma for the companies themselves is can they 

operate on both ends of the barbell or not, right? And so that is 

what they are struggling with and they are beginning to question 

that once the war is over will the left-hand side of the barbell live 

anymore? I would submit to you SOCOM [Special Operations Command] lives in that world all the time, the Intelligence Community 

lives in that world all the time, so there is an enduring market. 

Ms. HANABUSA. Thank you. Thank you very much. Thank you, 

Mr. Chair. 

Mr. SHUSTER. Thank you. You mentioned about the MRAP, and 

I got to know a Special Forces colonel, he is not a colonel now, he 

is a general now, but he was in Somalia, and he talked about they 

had in Somalia deployed some up-armored vehicles, I don’t know 

which country, South Africa or somewhere, and he came back after 

Somalia and said we need these if we ever go into an urban environment again. Well, you know, we just pooh-poohed that, and then 

we had the situation in Iraq and we should have learned from that, 

but going back to the point we don’t predict very well what we are 

going to be doing, and I guess we don’t listen to people that have 

been actually in those situations and know what they are talking 

about. 

You had mentioned earlier that Secretary Panetta and Secretary 

Gates had started to engage at least the large defense contractors. 

Is DOD doing anything, in your view, sufficient enough to reach 

down to the mid-level and smaller companies to engage with them 

in some kind of dialogue? Can you talk about that a little bit? 

Mr. CHAO. It is harder. There are things like the Mentor-Prote ́ge ́

programs that, you know, I find useful. It is back to the other entities who sort of are tasked to do that like DARPA that has been 

reaching, but in dealing with those companies, that has been one 

of their biggest frustrations has been they don’t even begin to know 

where to start, how to interface, how to, you know, how to begin 

to get in. They would love to have an ombudsman or somebody that 

could, you know, be their champion. They look to the small business sort of advocates, you know, to do that. As you know, some 

groups are better than others in terms of following that. It is a perpetual sort of grinding of the gears. 

Mr. SHUSTER. That would be something you would recommend 

for us to look at? 

Mr. CHAO. Yeah. 

Mr. SHUSTER. Having somebody in there that is looking out for 

the smaller guys more aggressively? I guess there is an office at 

DOD that is supposed to be doing that, and we are going to have 

them in front of us, but I get the sense that they don’t have too 

many resources behind them to be able to do that. 

Mr. CHAO. There is, and then again the thing to be careful about 

is setting, you know, the small business set-asides which I under-
25 

stand is part of a policy also has sometimes some unintended consequences, right? 

Mr. SHUSTER. Right. 

Mr. CHAO. There are companies that have loved sticking within 

that and don’t want to graduate because once you graduate you are 

in the maelstrom, and that is not quite what we want them to do. 

We want them to use that to get to a certain level, then graduate 

to the mid tier without having to sell out, and so we also have to 

be very vigilant about these one-size-fits-all things. 

Mr. SHUSTER. Mr. Downey. 

Mr. DOWNEY. I think they are, and I think your witness in the 

coming hearing will be able to talk to a lot of that. One of the problems is the Pentagon actually coming up with an inventory of who 

the aerospace and defense industrial base suppliers actually are. 

We don’t really have an inventory. The OEMs [original equipment 

manufacturers], the large producers have a pretty good handle on 

what their supply chain is, but there is not much of a horizontal, 

so Brett Lambert, who is the Deputy Assistant Secretary, does 

have a program that they have been implementing, but there are 

a lot of them, I think 25,000 suppliers is kind of a guesstimate. 

Mr. CHAO. 97,500. 

Mr. DOWNEY. 97,500. 

Mr. CHAO. Essentially everybody. 

Mr. DOWNEY. And so that is pretty hard. My own personal opinion is you should look at it. Doing business with the Pentagon is 

difficult, intimidating, and for small companies darn near impossible. To have the lawyers, accountants, and advocates that are 

necessary to understand the Federal Acquisition Regulations and 

operate successfully without penalty in that world scares away a 

lot of people and is scaring some of the people who are actually 

doing it now out of the business, and I think if we don’t get a handle on that we are going to lose capability that we wish we had. 

Mr. SHUSTER. Right. Mr. Watts, any comments? 

Mr. WATTS. Well, I just touch on the ITAR’s kinds of constraints 

on being able to access the global defense industry is, really is a 

significant constraint these days. And the specialty metals thing 

came back in Iraq when people had started running into IEDs [improvised explosive devices], you had Humvees that were not armored. You could get access to additional armor to add to the 

Humvees in country, but that ran into the very amendment kinds 

of restrictions which sort of said to people really if you are going 

to follow the rules and regulations you are going to have to go all 

the way back to the United States to get armor plate that is available locally. I mean, these kinds of constraints I think in that particular case probably led to some people dying, and, you know, 

those kinds of constraints it just seems to me we do need to do 

something about. 

Mr. SHUSTER. And one final question. What role, what is the appropriate role for the industry to work with DOD to assessing the 

health of the structure, you know, as we move forward? What is 

the role of industry? 

Mr. WATTS. DOD is going to supply an awful lot of the data that 

the Pentagon doesn’t have, for a starter, and, you know, the more 

you can get the companies to work as a team with the Defense De-
26 

partment or Homeland Security I think the better off you are going 

to be. 

Mr. SHUSTER. Do we have enough laws in place, in your view, 

that stop us from doing that, keeping these, you know, arm’s length 

instead of bringing them in and being a part of the team? 

Mr. WATTS. I go back to a program that in my industry days I 

was really familiar with, the B–2 bomber, which is not everybody’s 

favorite acquisition for a variety of reasons, including the unit cost 

at the end of the program, but that program was eventually won 

by Northrop [Grumman]. The competitor was Lockheed [Martin], 

who had built the F–117, and the Air Force basically wanted a 

high flyer, it was going to be a high-altitude penetrator, period, end 

of story. Two years or so into the program, the Air Force changed 

their mind, wanted low-altitude penetration, and as I discussed 

with some of the staffers for the panel a couple weeks back, that 

required a major wing redesign except the airplane was a flying 

wing. You imposed a lot of cost and a lot of delay by having essentially requirements creep in that particular program. We haven’t 

talked too much about the requirements process, but that is another piece of this whole system which, in my view, could use a lot 

more coherence and discipline. 

Mr. SHUSTER. Mr. Downey. 

Mr. DOWNEY. Mr. Chairman, there are in fact impediments to 

adequate cooperation. Some of those are cultural, some of them are 

institutional, some of them fall into the category of laws and regulations, and some of them are absolutely correct. At some level you 

do have competition and you do have a need to protect proprietary 

information on both sides, but increasingly industry views the relationship, and I am not talking about just in the last few months 

or even the last couple years, as increasingly adversarial. Witness 

the most recent letter out of the administration that would tighten 

or reduce the ability of military officers to participate in widely attended events, and so you end up with the problem of what is intended, what is written, what is interpreted, and when you get 

down into the organization, it is just an awful lot easier to avoid 

the whole thing than defend yourself or try to explain it later. 

Mr. SHUSTER. And I think it is a terrible problem. They don’t 

even want people to talk to people, and when it is completely appropriate and necessary. Mr. Chao. 

Mr. CHAO. It is a huge issue, and it is politically difficult and 

hard to raise, and it is another one where it is creating a really 

unintended consequence. If I can’t talk to people and I can’t sort 

of get basic information, so what happens? You are then forced to 

recruit retiring military people because that is the only way you 

get to understand what is going on inside, which then raises the 

specter of the issue of what is going on, and so I tighten laws about 

that, and then I get even more and more removed every step of the 

way until the point where I can’t talk to my basic customer in 

order to understand what is going on. And that then has secondorder consequences. But to sit there and say I want to speed up 

the revolving door is political suicide, and so it is a topic that we 

don’t really touch at. But again, I think you are touching on one 

of these core fundamental issues. If you can figure out a way to 

gently look at the issue, I would really encourage you to do so. 
27 

Mr. SHUSTER. That is what we hope to, but that brings us right 

back to what Mr. Watts started out saying, this is not a free market system because in the free market system you go to the customer, and say what do you want? Explain it to me, and I will try 

to come up with something that satisfies your needs. So it brings 

us right around, and that is one of the things we need to explore 

because we know it is a big problem. 

Again, I want to thank all of you for giving up your time today 

and your expertise. I am sure as we move forward, Ms. Hanabusa, 

I think she has some questions, and we may have questions further 

that hopefully we can talk to you and get your input because I 

had—just in this room a couple weeks ago we had a meeting with 

former Secretary Rumsfeld, and I said we had this panel and, you 

know, what do you see at the Department of Defense? He looked 

at me and smiled and he said, if I was advising a small business, 

I would tell them, don’t do business with DOD, he said it is too difficult. His quote, his comparison was it is like sleeping with a hippopotamus. Eventually it is going to roll over and crush you, and 

it will never know it did it to you. So it was a very concerning comment, but I am not willing to take that point that I think it is critical. And he did say also that a lot of the great ideas, I mean if 

not all the great ideas, the new technologies are coming from small 

and medium-sized companies that are nimble, but he said it is so 

difficult. So that is what hopefully we are tasked here, and we will 

come up with some solutions to change that, to change the culture, 

to change the laws and make sure that those small and mediumsized companies continue to be a very important and—very important part of the new technologies that emerge to protect our 

warfighters and our Nation. 

So, again, thank you all very much for being here, and we have 

a field hearing Friday in Akron, Ohio. Looking forward to it. I have 

a list here. You have got a number of companies, so I’m looking forward to that. As we go to Ohio on Friday I hope all our members 

or most of our members can join us. Again, thank you very much, 

and this hearing is adjourned. 

[Whereupon, at 4:37 p.m., the panel was adjourned.] 

A P P E N D I X 

OCTOBER 24, 2011 

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WITNESS RESPONSES TO QUESTIONS ASKED DURING 

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RESPONSES TO QUESTIONS SUBMITTED BY MS. HANABUSA 

Mr. WATTS. See attachment [Appendix, page 103]. [See page 16.] 

Mr. DOWNEY. [The information was not available at the time of printing.] [See 

page 16.] 

Mr. CHAO. [The information was not available at the time of printing.] [See page 

16.] 

QUESTIONS SUBMITTED BY MEMBERS POST HEARING 

OCTOBER 24, 2011 

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QUESTIONS SUBMITTED BY MS. HANABUSA 

Ms. HANABUSA. In your testimony, you mentioned that the Independent Panel 

that writes the Quadrennial Defense Review does not communicate well enough 

with defense industry while conducting their research. Specifically, who in industry 

does the panel need to communicate more with? 

Mr. DOWNEY. [The information was not available at the time of printing.] 

Ms. HANABUSA. Please explain in more detail the connection between Wall Street 

and the defense industry. 

Mr. CHAO. [The information was not available at the time of printing.] 

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