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“Empty Bins” and the US Defense Industrial Base
On a recent trip to London, I once again toured the Churchill War Rooms. Hidden beneath the streets of Westminster, the historic underground complex that housed the British government command center throughout the Second World War is a must see. The 1940s were truly a chaotic time in history, yet there was no denying the might of the American industrial engine, which supplied almost two-thirds of all the Allied military equipment produced during the war. President Franklin Roosevelt once said, “Powerful enemies must be out-fought and out-produced”.
Today, the world feels ever so fragile, with growing conflicts both large and small spreading throughout. The Russia-Ukraine War has now been followed by a series of escalating conflicts including the most recent attacks in Israel which have destabilized the Middle East region. Rising tensions between Venezuela and Guyana, as well as the ongoing jockeying in the South China Sea are growing concerns specifically during an election year. There are dozens of other conflicts ranging in size, and while the United States grapples with an increasingly fragile budget deficit, the question whether we can continue to finance forever wars in Congress rages on. At odds is the supply of both humanitarian and financial aid to Ukraine, as well as the almost $50B+ in military assistance (equipment, training, security) which some would argue is not winning, but flattening a country and destabilizing a region as a result.
Without question, the most precious cost of war is human life. Yet this week, we investigate the idea of “empty bins” within the US Defense industrial base, and what escalating tensions abroad and a stretched industrial based could mean for both innovation and investment.
Preventing “Empty Bins” within the US Defense Industrial Base
The US defense industrial base… is currently operating at a tempo better suited to a peacetime environment. In a major regional conflict—such as a war with China in the Taiwan Strait— the US use of munitions would likely exceed the current stockpiles of the US Department of Defense, leading to a problem of “empty bins.” – Center for Strategic & International Studies, January 2023
The US Defense Industrial Base (DIB), a cornerstone of the country’s military might, is facing significant production challenges. Many within and outside the defense apparatus are concerned about the US’ ability to manufacture enough munitions during a hot war. Prior eras demonstrate just how much has changed. During World War II, the DIB expanded significantly, producing a wide range of materials, from basic commodities like steel and rubber to specialized weapon systems such as planes and tanks. This growth continued into the Cold War, with defense spending increasing by an average of 8.4% annually from 1948 to 1963. R&D, test, and evaluation (RDT&E), and procurement saw even more substantial growth, averaging 19.7%. This period also witnessed a surge in defense-related employment, escalating from approximately 1.9mm workers in 1977 to 3.2mm in 1985. During World War II, the US DIB supplied over 2/3 of Allied equipment.
However, the end of the Cold War marked a turning point. The US government, reassessing its military requirements, began to reduce domestic defense spending. This reduction had a ripple effect across the DIB, especially among firms heavily reliant on defense contracts. The resultant restructuring and consolidation saw the number of prime contractors plummet from 51 to just 5 by the early 2000s. One report from Congress published this past October estimates that “over the course of the 1990s, the production output of the commercial DIB decreased by ~35%.” The ‘Big Five’ defense contractors now receive ~1/3 of all annual DoD contract obligations. This consolidation is also reflected in the fact that over 74% of major weapons systems identified by the DoD feature at least one of these top contractors. Despite this, a large number of smaller businesses (between 25k-30k), are involved in DoD contracts annually, representing over 70% of the companies working with the Department. The DoD also operates several government-owned, contractor-operated (GOCO) Ammunition Production Facilities (AAPs), crucial for producing most of the military’s conventional ammunition, propellants, and explosives. Key munitions for strategic use, especially in scenarios like Indo-Pacific aggression, include advanced systems like the Tomahawk cruise missile and the Long Range Anti-Ship Missile (LRASM). A 2022 DoD report highlights a growing reliance on a limited number of contractors for critical defense capabilities:
Over approximately the last three decades, the number of suppliers in major weapons system categories has declined substantially: tactical missile suppliers have declined from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and satellite suppliers have halved from 8 to 4. Today, 90% of missiles come from 3 sources.
To address some of these issues, Congress allocated approximately $3.8B for ammunition procurement in FY2022, which included significant investment in industrial facilities. But the DIB faces a myriad of challenges. A 2023 report by the National Defense Industrial Association highlighted the sector’s contraction, with the defense industry employing 1.1mm US workers as of 2021 vs. ~3mm in 1985 (a contract not all due to manufacturing automation). Additionally, the consolidation of the defense industry has led to increased reliance on a small number of contractors for critical defense capabilities. For example, from 2016 to 2022, the Defense Logistics Agency lost ~22% of its vendors (3k) – over the same time period, the DoD has lost 43% of its SMB vendors. This reliance on fewer vendors poses significant risks, particularly in terms of surge capacity and the ability to rapidly produce munitions and weaponry in a hot war scenario. For instance, precision-guided munitions could be depleted in less than a week in a conflict like the one hypothetically in the Taiwan Strait. Moreover, US military aid to Ukraine has further depleted some types of weapon systems and munitions. Scenarios where the DIB could struggle include high-intensity conflicts requiring large volumes of advanced munitions, such as a potential conflict in the Indo-Pacific region. The assessment of these vulnerabilities often comes from reports and analyses by defense experts, think tanks, and government assessments, including Congressional hearings and Department of Defense evaluations. These sources provide insights based on current capabilities, production rates, and strategic stockpiles, helping to identify potential shortcomings in the DIB’s readiness for various conflict scenarios. Generally, this research points to five key challenges:
- Consolidation and Over-Reliance: The significant consolidation within the DIB has resulted in an over-reliance on a small number of contractors. This creates vulnerabilities in the supply chain and reduces the industry’s overall agility and responsiveness.
- Aging Infrastructure and Technology: Much of the DIB’s infrastructure and technology are outdated, which hinders efficient production, especially of modern and advanced weaponry.
- Insufficient Surge Capacity: The DIB lacks the capacity to rapidly increase production in response to emergency or wartime demands. This is particularly concerning for critical munitions and advanced weapon systems.
- Supply Chain Vulnerabilities: Global supply chain dependencies, especially for critical raw materials and components, pose significant risks. These vulnerabilities could be exploited or disrupted in conflict scenarios.
- Workforce Challenges: There is a growing concern about the aging workforce and the gap in skilled labor within the defense sector (a topic we’ve discussed previously).
Addressing these challenges requires a multi-faceted approach. Solutions include creating a strategic munitions reserve, reassessing munition requirements, focusing on sustainable munitions procurement plans, and investing in sub-tier suppliers. In addition, streamlining processes such as Foreign Military Sales and International Traffic in Arms Regulations can enhance efficiency and responsiveness. Lastly, lessons from the Cold War period include maintaining a diverse and robust production infrastructure, fostering public-private partnerships, ensuring adaptable manufacturing capabilities, strategic stockpiling, continuous R&D, workforce development, efficient supply chain management, and preparedness for rapid mobilization. In this context, we think there’s an important role to play for software businesses serving the defense industry and government, though we know full well that their ability to support the DIB relies significantly on intelligence process and policy changes. For example, we see opportunities for supply chain management software to enhance visibility and resilience, and forecasting tools for better demand forecasting and resource allocation. Automated design and prototyping, process automation, and optimization tools can reduce lead times and increase manufacturing efficiency. Additionally, AI/ML can be leveraged for predictive maintenance and quality control, ensuring the defense industrial base is agile, efficient, and capable of meeting the demands of modern warfare.
The US DIB now faces challenges that necessitate a strategic overhaul and the adoption of innovative technological solutions. The integration of better software and technology into the defense industrial ecosystem represents just one of many pivotal steps towards ensuring that the US remains prepared and resilient in the face of future conflicts. The lessons learned from the past, combined with modern technological advancements, point towards a more dynamic and responsive defense industrial base, crucial for maintaining national security in an increasingly complex global environment.