President's Corner

U.S. Must Resolve Industrial Base Issues

by Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret)

June 2003 — The question of whether the United States may be overly dependent on foreign suppliers for critical military equipment has been debated for decades. The Army, particularly, has been concerned about the reliance on non-U.S. suppliers for critical items used in the manufacturing of ammunition. The issue now is taking added importance in the aftermath of the U.S.-led war in Iraq, which some of our NATO allies—whose industries are suppliers to the U.S. military—did not support.

What worries Army leaders is the hypothetical situation in which a country that does not agree with U.S. policies may take retaliatory action by refusing to export certain items that are needed in the production of ammunition. During the recent conflict, for example, the Swiss government refused to sell components to Honeywell, because it did not agree with the U.S. military stance on Iraq. The problem was solved and did not impact U.S. combat operations, but it served as a cautionary tale nonetheless.

In the ammunition sector, there are at least 71 items (out of 302 critical items) for which there is only one U.S. supplier. Approximately 10 percent of our ammunition components come from 13 different countries. (By the way, under this definition, Canada is considered part of the North American industrial base and not viewed as foreign.) The reality is that the United States, in many instances, depends on foreign sources for critical components, because making them domestically is not profitable for a U.S. company. Declining U.S. orders in the post-Cold War era resulted in a 68 percent decline in industrial capacity. The basic problem is that many ammo items have episodic demand and are produced in small quantities. Further, manufacturers must make significant capital investments, making their products marginally profitable.

Under our capitalist approach to industrial policy, companies that cannot make a profit from government contracts go out of business or into other lines of business. When that happens to a company that makes a critical component for ammunition, the U.S. government has no choice but to seek a foreign source.
That happened, for example, when the only U.S. supplier of cotton linters shut down its operations, unable to stay alive on declining government orders. Linters are indispensable items in ammunition production. Now, the U.S. Army buys them from Germany. Another example is a mortar fuze that we also purchase from Germany, because we do not have a U.S. supplier. The flap with the Swiss over the Iraq war got the Army’s attention, because the Swiss supply a unique propellant for the 25 mm armor piercing round employed in the Bradley fighting vehicle.

The dependency on foreign suppliers for raw materials also is an issue of concern. As it turns out, the world market for tungsten is dominated by China. Only one U.S. firm currently can process tungsten, which is widely used in tooling for many industrial applications. China has been capturing a growing share of the market and has been tightening exports (much like OPEC controls oil exports), making tungsten more expensive for other countries to buy. A tungsten mine in California had to shut down, because it could not compete with the Chinese.

No matter how one feels about the merits of globalization, it would be fair to say that, when it comes to national security, it does not make sense to put the U.S. military at risk because a supplier nation disagrees with our policies.

Congress has spoken on this issue before. Legislation passed in 1999 stipulated (under the so-called “806 section”) that if a military component is viewed as being at risk, the Defense Department must restrict that procurement to U.S. sources.
In an effort to better focus on these ammunition industrial-base challenges, the Army created a program executive office for ammunition. That office has been working with the Joint Munitions Command on a comprehensive strategy to guide future industrial-base decisions.

Meanwhile, the top leadership of the Army is grappling with a related but separate problem: what to do about the Army’s ammunition production facilities, which are costly for the Army to run but may be needed for national security reasons. The Army Materiel Command supports the notion of migrating to public-private partnerships. After all, 95 percent of all munitions are produced by the private sector.

The government today owns and operates 14 facilities that run 73 production lines and employ 7,000 workers. Already, the government has contracted out the operation of 69 production lines to private firms, in arrangements known as GOCOs (government owned contractor operated).

What the future holds for Army plants is uncertain. A study by the Rand Corporation, which has not been released, reportedly recommends privatization of those plants. AMC is working on alternative approaches, in an effort to address industry’s concerns that there are few incentives in place for any company to want to invest in recapitalization of aging facilities. Any final decisions would be made by the secretary of the Army.

As a 2005 round of base closures approaches, it is important for the Army to come up with a viable industrial base strategy that protects the national interests but also makes financial sense. In previous base-closure rounds, ammo plants were not included in the BRAC process. The Army closed facilities over the years, but did so outside the BRAC deliberations. This time around, it may be different.

There is no question that the industrial base must be properly sized and modernized, but there clearly is no magic or simplistic solution. Undoubtedly, any strategy to reshape the industrial base will require close cooperation between government and industry. It is important for the nation’s security to ensure that our ammunition production capabilities remain the best in the world.

One strategy to consider is to bring single source/foreign source items under Army responsibility for capitalization, either at Army organic or private U.S. facilities. The Army could then complete the contracts on a cost-plus award fee basis. Since there would essentially be no capital barrier to market entry, there would be ample competition for most of the items and a resulting robust industrial base, even if each competition only resulted in one award.

The Army is working this area hard. Now is the time for industry to make an input. What do you think?

Please e-mail your comments to lfarrell@ndia.org.

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President's Corner

U.S. Must Resolve Industrial Base Issues

by Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret)

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