New Report: Defense Industrial Readiness ‘Going in the Wrong Direction’

There’s a growing “mismatch” between what the National Defense Strategy says is needed for the coming years and the state of the defense industrial base, which is shrinking, less able to surge production, dealing with ever-greater uncertainty, and facing a worsening shortage of workers, according to a new report from the National Defense Industrial Association.

The 2023 edition of the NDIA’s annual report on the health of the defense industrial base said the “resiliency” of the industrial base “was sacrificed as part of the 1990s Peace Dividend.” The qualities that once made the base a “powerhouse”—stable and predictable budgets, a highly skilled, experienced workforce, diversified and modern infrastructure, manufacturing innovation and sufficient capacity—have all “atrophied,” according to the report.

In their place is now a “just-in-time” scheme that offers little depth and ability to “reconstitute” in the event of an unexpected conflict, such as Russia’s invasion of Ukraine. That is seemingly at odds with the latest edition of the National Defense Strategy, which says the U.S. must be able to deter war with China—the U.S.’s “pacing challenge” in military capability—or win a protracted conflict if deterrence fails.

The NDIA report was released Feb. 8; the same day the heads of major defense industry associations—including David Norquist, president of the NDIA—testified before the House Armed Services Committee on factors affecting the nation’s ability to surge weapons production for a major war.  

Many of the concerns raised by the NDIA have been pointed out before but are continuing “in the wrong direction,” the report said, including:

  • People: The NDIA notes that while there were three million people working in U.S. defense industries in 1985, that number has dwindled to 1.1 million.
  • Companies: In five years, the “defense ecosystem” has lost 17,045 companies; vendors that either went out of business, were absorbed by another company, or exited the sector. In the case of small businesses, their departure was often driven by the bureaucracy of dealing with Pentagon contracting or the long delays between proposals and contract awards. The DOD estimates the number of small businesses doing work for the Pentagon fell 40 percent in the last 10 years, despite a growing panoply of programs specifically designed to attract and retain them.
  • A Shrinking Part of the Economy: As a share of Gross Domestic Product, defense spending has declined from 5.8 percent to 3.2 percent since 1985, “and the Congressional Budget Office projects a further decline to 2.7 percent by 2036.”
  • Predictability: The federal government has operated under a continuing resolution in 13 of the last 14 years, lowering purchasing power and delaying new starts “essential for modernization,” production increases for programs ready to expand, and advanced procurement funding “essential for building capacity.”
  • Limited Surge Capability: The lack of investment in infrastructure, equipment, “idle capacity and tooling,” and too much reliance on single-source vendors “challenges both the readiness and reconstitution” capability of the DIB.

The NDIA said the Pentagon “must prioritize removing” the red tape that is “strangling the defense industrial base” and begin a campaign of “significant … predictable” investments to rebuild the DIB’s “strategic endurance and resilience.”

A large part of the NDIA report is a survey of member companies, which come from the aerospace, shipbuilding, vehicles, materials, electronics, and other defense sectors. The NDIA said its survey included responses from 171 companies, who collectively hold 35 percent of contracts of the Pentagon’s acquisition budget, ranging from small shops to major prime contractors.

Collectively, respondents said the Pentagon acquisition process is “growing more—not less—cumbersome,” according to the survey summary. The lack of consistency and predictability of budgets is “breaking companies and causing significant workforce uncertainty,” the latter issue of which is affecting “even our most strategic defense programs.” Inflation—“a cross-cutting issue”—is playing hob with many programs, in part because labor rates are often locked in at the beginning of long-term contracts, and many had small, if any, escalation provisions.

The survey asked about a number of defense industrial climate factors, including:  

  • Inflation: 72 percent of companies surveyed picked “increased labor costs” as the top consequence they’ll feel because of inflation. More than 50 percent chose increased costs of materials and trouble hiring new workers. Rounding out the top six impacts were supply chain delays, employees quitting and reduced customer spending. Only six percent of those answering the survey expected “no major impacts” from inflation in the coming year.   
  • Ease of Doing Business: The Pentagon has a lot of work to do to make it easier for companies to work with it—62 percent of respondents said it’s “somewhat difficult” or “very difficult” to do business with the DOD, compared to 48 percent for other government agencies and 34 percent for nongovernment organizations. Only 13 percent said it was “very easy” or “somewhat easy” to work with the Pentagon, versus 47 percent of nongovernment organizations. 
  • Hiring: Good help is hard to get. For science, technology, engineering, and mathematics (STEM) jobs, 82 percent of companies said it’s “somewhat” or “very” difficult to hire workers. It’s the same story for skilled workers and tradespeople, at 64 percent, and workers with security clearances, at 75 percent. In a separate question, companies were asked how hard they expect it to be competing with nondefense companies for workers, and 80 percent answered “somewhat” or “very” difficult. 
  • Toughest Issues: Asked to name “the most pressing issue” facing the DIB, almost a third of respondents—30 percent—said it was the “burden of acquisition processes and paperwork.” About a quarter—23 percent–named “finding and retaining talent,” almost even with “lack of budget stability,” at 22 percent. Inflation was the only other issue to crack 10 percent. 
  • Help Us: The two top answers to “what can government do to help the DIB” were “streamline the acquisition process” and “ensure budget stability,” at 34 percent each. Eleven percent said “enhance funding of research and development for emerging technologies,” nine percent said simplifying the process of security clearances, and six percent want the government to help with training of a skilled workforce.
  • Outlook: Queried on whether they think general business conditions will improve in the next year, most respondents—45 percent—said things will likely stay the same, with 33 percent predicting “worse” and 22 percent expecting “better.” Asked about how they expect conditions to be in the defense business sector a year from now, 57 percent said “about the same,” but 29 percent expect things will be worse. Only 14 percent expect conditions to be better.