Lynn: U.S. Must Preserve Its Defense Industrial Base

NEW YORK, May 12, 2011 — Com­pe­ti­tion, a glob­al defense mar­ket and tar­get­ed research and devel­op­ment spend­ing will be crit­i­cal in pre­serv­ing the nation’s defense indus­tri­al base dur­ing the slow­down in Pen­ta­gon spend­ing, Deputy Defense Sec­re­tary William J. Lynn III said here last night.

In keynote remarks at the Intre­pid Sea, Air and Space Muse­um for the Roy­al Bank of Cana­da Defense and Aero­space Con­fer­ence, Lynn said that because pre­serv­ing the indus­tri­al base’s capa­bil­i­ties is cru­cial, the Defense Depart­ment is devel­op­ing a roadmap to do it effec­tive­ly in an era of lim­it­ed fund­ing. The defense indus­tri­al base is a rel­a­tive­ly recent devel­op­ment in U.S. his­to­ry, Lynn said.

“Before World War II, we relied almost entire­ly on an arse­nal sys­tem, in which the gov­ern­ment designed and pro­duced muni­tions and weapon sys­tems,” he said. “That arse­nal sys­tem was a corol­lary to our reliance on mass mobi­liza­tion — we fought wars and then demo­bi­lized. With no large stand­ing army, he added, the nation didn’t need a stand­ing mil­i­tary indus­tri­al base.

But the risks inher­ent in the arse­nal sys­tem became clear dur­ing World War I, the deputy sec­re­tary not­ed. “We were not able to pro­duce most of the weapons and the muni­tions that we need­ed to fight that war,” he said. “We had to rely large­ly on the British and the French indus­tries to sup­ply our troops.”

The par­a­digm shift­ed with World War II, Lynn said, as the nation engaged the Amer­i­can indus­tri­al base, pro­duc­ing a tide of weapons and mate­r­i­al that con­tributed enor­mous­ly to win­ning the war — a devel­op­ment that large­ly elim­i­nat­ed the arse­nal sys­tem and cre­at­ed an endur­ing part­ner­ship of sci­ence, indus­try, and the mil­i­tary. “That part­ner­ship has giv­en us the tech­no­log­i­cal edge that we enjoy in bat­tle,” the deputy sec­re­tary added, not­ing that the muse­um where he was speak­ing — the air­craft car­ri­er USS Intre­pid — is a tes­ta­ment to America’s indus­tri­al prowess.

Com­mis­sioned at the height of World War II, Intre­pid saw action in the Pacif­ic, Lynn told the audi­ence. It was trans­formed into an anti-sub­ma­rine car­ri­er dur­ing the Cold War, and its flight deck — the first fit­ted with a steam cat­a­pult — launched planes dur­ing the air cam­paign over Viet­nam.

“Our defense indus­tri­al base has emerged in the past three gen­er­a­tions as a nation­al strate­gic asset — an asset that is not a birthright and can­not be tak­en for grant­ed,” Lynn said. “Thou­sands of firms — some big, oth­ers small — equip our mil­i­tary. These firms, their sup­pli­ers, and their sup­pli­ers’ sup­pli­ers, are the links in a chain that, if bro­ken, can have out­size impact on our mil­i­tary capa­bil­i­ties.”

Today’s defense indus­tri­al base is more glob­al, more com­mer­cial and more finan­cial­ly com­plex and com­pet­i­tive than ever before, Lynn said. “A one-size-fits-all pol­i­cy is not appro­pri­ate now for the defense indus­tri­al base, if it ever was,” he added.

There­fore, Lynn said, he’s lead­ing an effort with Ash­ton B. Carter, under­sec­re­tary of defense for acqui­si­tion, tech­nol­o­gy and logis­tics, and Brett Lam­bert, deputy assis­tant sec­re­tary for indus­tri­al pol­i­cy, to put togeth­er a roadmap for ensur­ing the health of the indus­tri­al base as defense spend­ing slows down.

“We’re going sec­tor by sec­tor, tier by tier, and our goal is to devel­op a long-term pol­i­cy to pro­tect that base as we slow defense spend­ing,” Lynn said. The review will inform defense spend­ing and acqui­si­tion deci­sions, he added, and also will deter­mine how the Defense Depart­ment views merg­er and acqui­si­tions pro­pos­als and activ­i­ties in the defense indus­try.

“It will help us ensure that the tax­pay­ers’ invest­ment in this indus­tri­al base that we’ve built since World War II is pro­tect­ed,” he said. Three themes are emerg­ing about how to main­tain a vibrant indus­tri­al base, the deputy sec­re­tary said: com­pe­ti­tion, the glob­al defense mar­ket, and tar­get­ed spend­ing for research and devel­op­ment.

Not­ing that vig­or­ous com­pe­ti­tion in the defense indus­tri­al base has pro­vid­ed the armed forces with more reli­able equip­ment and bet­ter tech­nol­o­gy than that of the nation’s adver­saries, Lynn said nor­mal mar­ket forces should con­tin­ue to shape the defense indus­try, ensur­ing it’s exposed to 21st cen­tu­ry tech­nol­o­gy, to tech­no­log­i­cal inno­va­tion, and to cap­i­tal mar­kets.

“Not only is this good eco­nom­ic the­o­ry,” Lynn said, “but it yields the best goods and ser­vices for the warfight­er.” The deputy sec­re­tary recalled the last defense slow­down in 1993, when then-Defense Sec­re­tary William Per­ry called indus­try lead­ers to a din­ner meet­ing at the Pen­ta­gon — a meet­ing that came to be known as “the Last Sup­per” — to tell them that reduced defense spend­ing would require indus­try to con­sol­i­date to cope with a reduc­tion in demand. The tax­pay­ers, Per­ry explained, no longer could afford to under­write the over­head of so many defense firms. In less than a decade, Lynn told the audi­ence, 50 major com­pa­nies con­sol­i­dat­ed into six. But a new Last Sup­per isn’t on the hori­zon, he added.

“We are not look­ing for fur­ther con­sol­i­da­tion in the top tier of the defense indus­tri­al base,” he said. “Few­er major defense sup­pli­ers would not strength­en indus­try, nor would it ben­e­fit the gov­ern­ment. Indeed, it would real­ly rep­re­sent a return to some­thing like the arse­nal sys­tem that we dis­card­ed sev­er­al decades ago for good rea­son.” But that doesn’t mean the Defense Depart­ment oppos­es all, or even most, future con­sol­i­da­tions, Lynn said.

“Merg­ers and acqui­si­tions are a nor­mal response to bud­get changes, and we should not reflex­ive­ly oppose this mar­ket reac­tion,” he said. “But we will be scru­ti­niz­ing pro­pos­als that come for­ward to ensure that the government’s inter­ests are pro­tect­ed. Adjust­ments that lead to greater effi­cien­cy or inno­va­tion will be wel­comed. We are seek­ing to pro­mote strong, well-financed busi­ness­es that avoid over-lever­ag­ing and poor bal­ance sheets. The intent is to ensure indus­try emerges stronger after these struc­tur­al changes.” Mean­while, Lynn said, the Defense Depart­ment intends to use its posi­tion as a buy­er, its sub­sidy of research and its abil­i­ty to fore­cast needs to boost invest­ment, com­pe­ti­tion and inno­va­tion to the max­i­mum pos­si­ble extent while still allow­ing mar­ket forces to pro­pel the sec­tor for­ward.

“We are in this for the long term,” he said. “We need indus­tri­al part­ners and finan­cial back­ers who think and act like­wise. In this respect, our view­point is sim­i­lar to long-term invest­ment, not short-term spec­u­la­tion. Think War­ren Buf­fet, not Gor­don Gekko.” The sec­ond theme emerg­ing from the Defense Department’s study of the indus­tri­al base is the con­tri­bu­tion inter­na­tion­al sales make in sta­bi­liz­ing the defense indus­try when U.S. defense spend­ing slows, Lynn said.

“To keep our base healthy, it is in our inter­est for defense com­pa­nies to com­pete glob­al­ly,” he explained. How­ev­er, he said, an “archa­ic” export con­trol sys­tem is imped­ing that dynam­ic.

“It was devel­oped dur­ing the Cold War in a peer-to-peer com­pe­ti­tion with the Sovi­et Union that is long gone,” he said. “The Berlin Wall is gone, but many of these export bar­ri­ers remain.” That sys­tem fre­quent­ly fails in its cen­tral pur­pose of pre­vent­ing states of con­cern from acquir­ing sen­si­tive tech­nolo­gies, Lynn said, and it also makes it dif­fi­cult for close allies to buy weapons from U.S. com­pa­nies, even when they’re fight­ing along­side U.S. forces.

“The bar­ri­ers that we place at this point in the export con­trol sys­tem look some­thing like a mar­riage of the com­plex­i­ty of the Inter­nal Rev­enue Ser­vice with the effi­cien­cy of the Depart­ment of Motor Vehi­cles,” he said. “It’s some­thing we have to change.” While the export con­trol sys­tem should build high walls around tech­nolo­gies that tru­ly are sen­si­tive, Lynn said, it also should allow U.S. com­pa­nies to com­pete on the glob­al mar­ket with tech­nolo­gies that are wide­ly avail­able.

Pres­i­dent Barack Obama’s admin­is­tra­tion is work­ing to bring about export con­trol reform, the deputy sec­re­tary said. The administration’s pro­pos­al is built on what offi­cials call “the four sin­gles” — a sin­gle export agency, a sin­gle tiered list of con­trolled items, a sin­gle coor­di­na­tion cen­ter for enforce­ment, and a sin­gle, uni­fied IT infra­struc­ture. The pres­i­dent and the sec­re­taries of state, defense and com­merce all are com­mit­ted to export reform, Lynn said. Relat­ed progress in this area, he added, includes pas­sage of defense trade coop­er­a­tion treaties with the Unit­ed King­dom and Aus­tralia, which may set an exam­ple of how a new export con­trol sys­tem might work.

A par­al­lel effort seeks to change poli­cies for tech­nol­o­gy secu­ri­ty and for­eign dis­clo­sure, Lynn said. “How we trans­fer sen­si­tive tech­nolo­gies right now is gov­erned by 13 pret­ty inde­pen­dent process­es,” he said. “Those process­es aren’t inte­grat­ed, they’re not syn­chro­nized, and as a con­se­quence they often impede our abil­i­ty to equip our coali­tion part­ners.” A corol­lary of ensur­ing U.S. firms are com­pet­i­tive abroad is wel­com­ing inter­na­tion­al firms to the Unit­ed States, Lynn said. EADS — a Euro­pean firm — bid on the aer­i­al tanker con­tract with­out an Amer­i­can part­ner, he not­ed, and a strong com­pe­ti­tion ensued in which Boe­ing, an Amer­i­can com­pa­ny, ulti­mate­ly pre­vailed.

“But the real win­ners were our warfight­ers who got a great tanker and the Amer­i­can tax­pay­ers who saved bil­lions of dol­lars,” he said.

The third theme emerg­ing from the Pentagon’s indus­tri­al base study is the impor­tance of main­tain­ing a tar­get­ed research and devel­op­ment pro­gram, Lynn said, not­ing that although defense spend­ing plunged dur­ing the 1970s after the Viet­nam War, the Defense Depart­ment made sure that promis­ing research and devel­op­ment con­tin­ued — with stealth tech­nol­o­gy among the results of that effort.

“Stealth tech­nol­o­gy — one of our most impor­tant advan­tages today — wouldn’t be avail­able at all if it weren’t for the care­ful stew­ard­ship dur­ing the 1970s,” Lynn said. “Today, we need to con­cen­trate on the tech­nolo­gies that we think are going to be influ­en­tial in the next decade and the decade after.” Those tech­nolo­gies include long-range strike sys­tems, unmanned aer­i­al vehi­cles and cyber­se­cu­ri­ty, he said.

“Each of these tech­nol­o­gy areas will be crit­i­cal in future con­flicts,” the deputy sec­re­tary said. “We do not yet know the shape they will take. We don’t know the pre­cise advan­tages they will con­fer. But unless we shield and pro­tect the [research and devel­op­ment] invest­ments and sup­port them now, we’re going to deny the future deci­sion-mak­ers the oppor­tu­ni­ty to bring to bear these tech­nolo­gies in our mil­i­tary forces.

As part of his deficit reduc­tion plan, the pres­i­dent has called for $400 bil­lion in reduc­tions to the defense bud­get over the next 12 years, as well as a fun­da­men­tal eval­u­a­tion of America’s mis­sions, capa­bil­i­ties and role in a chang­ing world, Lynn said.

Though these chal­lenges are enor­mous, he said, the depart­ment must take them on while fight­ing one war, wind­ing down anoth­er and par­tic­i­pat­ing in oth­er mis­sions around the world. “The road ahead will not be easy,” Lynn acknowl­edged, but he invoked a favorite say­ing of Defense Sec­re­tary Robert M. Gates: “Dif­fi­cult is not impos­si­ble.”

“The chal­lenge for us is to man­age this slow­down in defense spend­ing with­out dis­rupt­ing the capa­bil­i­ties of the world’s most effec­tive fight­ing force,” Lynn said. “The best out­come would be for con­trac­tors to con­tin­ue to earn fair prof­its for supe­ri­or per­for­mance, the depart­ment to get qual­i­ty prod­ucts for an afford­able price, and the tax­pay­er to be able to under­write our secu­ri­ty at an accept­able cost.

“I believe such an out­come is well with­in reach,” he con­tin­ued. “But we need to con­tin­ue to exe­cute the lessons of mak­ing tough choic­es ear­ly, pri­or­i­tiz­ing now, bal­anc­ing our reduc­tions and avoid­ing pre­cip­i­tous cuts.”

U.S. Depart­ment of Defense
Office of the Assis­tant Sec­re­tary of Defense (Pub­lic Affairs)

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