Cipher Brief Expert Robert Eatinger has 35 years of experience practicing law in the fields of national security, intelligence, and international law. He is a solo practitioner at Robert J. Eatinger, Jr., PLLC, practicing federal law with a national security and intelligence law focus and the founding Principal of SpyLaw Consulting, LLC. Bob retired from the Central Intelligence Agency in 2015 where he was the Senior Deputy General Counsel.
The unclassified summary of the United States 2018 National Defense Strategy (NDS) warns that “[w]ithout sustained and predictable investment to restore readiness and modernize our military to make it fit for our time, we will rapidly lose our military advantage, resulting in a Joint Force that has legacy systems irrelevant to the defense of our people.” The NDS admits that modernizing our military will require changing how DoD deals with industry and commits to streamlining processes so that new entrants can provide cutting-edge technologies to the military. That, however, is not enough. The most effective way to attract new vendors to the defense marketplace is to allow them to make a market-based profits.
The U.S. defense acquisition system has developed into an immensely complex legal and process-oriented morass laden with requirements added after real or perceived concerns DoD was overcharged or overpaid for weapons systems or their parts. Fear of paying too much is so ingrained in the system that a variety of statutes and regulations limit profits of the defense industrial base. According to the independent digital financial media company CSIMarket, the Aerospace and Defense industry gross profit margins ranged from 88th to 101st out of 103 ranked industries over the last five fiscal quarters. Streamlining a defense acquisition system that forces companies to accept artificially low profits is not the type of change likely to attract new entrants into the defense industry that will bring the cutting-edge technologies DoD needs in the face of tremendous technological advances by our potential adversaries.
While forcing companies to accept lower profit margins may appear to be in the national best interest, the reality is quite different. Rather than attract new entrants, capping profits pushes American industry out of the defense marketplace towards other, more lucrative, customers. This is not a new or novel observation. The National Defense Industrial Association has noted that artificially low profits disincentivizes companies that otherwise could and would provide our Armed Forces with world class products and services. At the 2018 Association of the U.S. Army Global Force Symposium, the Assistant Secretary of the Army for Acquisition, Logistics, & Technology noted that customer’s in the commercial world are willing to pay a premium to get things done fast and proposed the Army offer higher profit margins for contractors who can deliver innovative technology faster.
Mercury Systems, Inc., a member of the aerospace and defense industry, identified the lack of a clear path for firms to profit from engagement with the military as a primary risk to modernizing the military. In a 2018 paper, they found there was no evidence that a series of defense acquisition reforms had helped better prepare the United States and its allies to meet challenges they face. In fact ,these reform efforts may have made things worse. As Mikhail Grinberg of the Center for a New American Security warned, the United States might be unable to prepare its military for great power competition if it does not build a clear path for firms to profit from engagement with the military. Mr. Grinberg recommended creating high-margin profit pools for contractors to reduce lead times and incentivize more corporate investment into R&D.
Fewer interested U.S. companies also results in a smaller defense industrial base that increases U.S. reliance on foreign manufacturing and makes supply chains more susceptible to disruption by epidemics and weather events, bankruptcies, foreign acquisition, and low rates of internal R&D investment. Concerns over the integrity of supply chains are real.
This was the lesson of the F-35 Joint Strike Fighter, the most advanced fighter aircraft in the world and the most expensive weapons program the United States has ever undertaken. The F‑35’s production is dependent on foreign manufacturing, in part intentionally so to attract international interest in purchasing the aircraft. The United States’ ability to build the F-35 was put into question when the COVID-19 pandemic impacted the foreign supply chain, forcing Lockheed-Martin’s production line workers to wait for parts to arrive from overseas.
The Congress and DoD must figure out how to attract more U.S. companies into the defense industrial base. Enticing more companies into the defense market will bring more commercial capabilities to DoD; provide greater access to cutting edge capabilities, and increase competition to foster both innovation and competitive pricing. Additional companies in the defense marketplace will also create a well-capitalized, resilient defense technology and industrial base that is critical to maintaining DoD’s technology and capability advantage A fiscally healthy industrial base will promote private investment in R&D necessary to develop new technologies and support more robust manufacturing capabilities and supply chain presence located in the United States.
It is time for Congress to mandate a serious look at whether the need to attract the innovation needed to modernize the Joint Force while remaining fiscally responsible is better met by artificially suppressing defense profits or allowing market forces to control prices. As Congress legislates the National Defense Appropriation Act for Fiscal Year 2021, the House and Senate could amend section 801 in the Senate’s version (S. 4049), to add a requirement that DOD assess and propose specific actions to make the Defense Department a customer that will attract more commercial interest including through the availability of market-based profits.
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