On Tuesday, October 19, 2010, Northrop Grumman Chief Executive Officer and President Wes Bush addressed the Defense Industrial Initiatives Group of the Center for Strategic and International Studies in Washington, D.C.
Defense Industrial Base: Current and Future Issues
I really appreciate the opportunity to be here today, and I’m especially pleased to be able to speak about the defense industrial base and some of the challenges I see on the horizon.
Our defense industrial base is a fascinating product of some key strategic decisions that have been made over many decades by policy makers, technologists, and the capital markets. It is a reflection of the core strategy we as a nation have adopted for our defense. That strategy has as its foundation an extraordinary cadre of well trained, equipped, and dedicated service men and women enabled by absolute technological superiority. The Department of Defense does an amazing job of recruiting, training, and creating an environment in all of the armed services where dedicated men and women are able to superbly serve their country. It is the job of our defense industrial base to ensure that they are always equipped with the very best capabilities.
But our ability to ensure those outcomes is being challenged on multiple fronts, and I believe the policy decisions associated with the defense industrial base must reflect its role as a strategic asset. A healthy defense industrial base is critical to our nation’s security; to our nation’s technological standing in this most technological of ages; and to the hundreds of thousands of Americans it employs. For the next few minutes I’d like to talk about the base – about the pressures on it; about the choices facing those deciding its future, and about the implications of those choices.
When one examines the changing threats our defense industrial base has had to address since the end of the Cold War, one is struck by how versatile and resilient the base has been. Two decades ago the Soviet Union fell, and with it fell a relatively tidy geostrategic situation. Back then it was easier to spot the bad guys. Most had governments to talk to, and most had armies, navies and air forces to analyze and to counter.
When the Soviet Union fell, things changed. One of those changes was perhaps best summed up by Marine General Charles Krulak back in the mid-nineties. He said that the future would be characterized by three-block wars. In one block, our forces might be fighting conventionally trained and equipped military adversaries. In the next block over, our forces might be contending with violent insurgencies. And in the block next to that, our forces might be conducting humanitarian operations. It is interesting to note how perceptive his comments were relative to what we have been engaging in these past years.
We certainly need to prepare for more of that. But we also need to prepare for potential adversaries that seek to field nuclear arsenals, biological weapons, ballistic missiles, and counter-space capabilities. These capabilities could be wielded by states – or by stateless terrorist organizations. We can add the threat of cyber attack from unknown actors who threaten everything from our defense capabilities, to our core infrastructure, and even the bank accounts of our citizens. We also face multiple regional instabilities that could boil over at any moment threatening our global interests in the process. And of course there are a number of growing economic powers out there who want to reflect their economic strength in their military strength.
The whole notion of how our nation defends its citizens and interests has changed. Yes, there remains a body of enduring security needs that we will always face. We will always need to assure U.S. military dominance through power projection, strategic deterrence, global access, and global awareness. But in addition, our defense industrial base must now supply tools and solutions that address the needs of the global commons. The global commons includes more than the familiar geo-political hot spots – it now includes cyber-space, and energy, food and water-rich areas among a world population that grows every year in numbers, desperation, and technological savvy. In short, the dynamic range of threats facing our nation and its interests is unparalleled in our history.
In addition, our defense industrial base will be called upon to find those needed solutions at a time of tremendous pressure on the nation’s investments in defense. Certainly, we in industry need to do all we can to provide the most cost-effective systems and capabilities. We at Northrop Grumman, as have our peers in industry, have been working hard to reduce overhead, streamline our organization and processes, and increase productivity so we can provide our customer with the best value possible – and our investors with an attractive rate of return.
The industrial base, of course, did not spring forth in a vacuum. It is, rather, an extraordinary product of the capitalism that has forged America’s economic might – the most successful economic system in recorded human history, and one that rewards initiative, merit, foresight, and risk-taking with national prosperity and higher standards of living. It is easy to forget that when the daily papers continue to report news of recession. But even today, despite our economic challenges and the current recession, the American free market remains the most powerful economic engine in the world. And the defense industrial base that works within that system – and is key to its long term defense – is still unparalleled as a strategic asset. We have every opportunity to extend the supremacy of that base well into the future. But maintaining that leadership will require determined action.
So let me touch on some of those necessary actions.
Our defense industrial base is, and always has been, much more about people and innovation than about facilities and production rates. And that base draws on three principle sources for its strength. First, it relies on an intimate relationship with its customers – a relationship that generates innovation, and the program funding necessary to realize that innovation. Those customers include the defense and intelligence communities; the emerging homeland security community; congress; and ultimately the American taxpayer. I’ll talk about the international customer in a moment.
Second, the base relies on the constant influx of technical and management talent to drive the innovation that creates our technological superiority.
And third, like other industries, it relies on the capital markets to provide the investment and financing required for the large-scale undertakings characteristic of the base. All three of these sources must be engaged, robust, and committed to achieve the outcomes upon which our national security depends.
There are clear risks in all three areas. As economic conditions place more and more pressure on government spending, the customers’ appetite for new innovation can recede. It takes great discipline to preserve that innovation at a meaningful level. But without the customers’ commitment to innovation, not only do new science and engineering graduates avoid our industry, but current talent in our industry will depart as well. We’ve seen it happen before, and the large demographic “hole” we have in our industry today can be directly traced to those talent departures in the 1990’s.
And we all know that the capital markets are very savvy. They see a direct relationship between innovation drivers and return opportunities. When they sense a decline in the former, they presume a decline in the latter and invest accordingly.
The three components – customer drive and investment in innovation, the ability to attract and retain talent, and the availability of capital all must work together to make the defense industrial base strong and capable of fulfilling its mission as a key element of our national security.
So what can we do about these growing challenges? There are a couple of things I would like to focus on today – concepts that I think are going to be important as we move forward. I don’t claim that these are the only two things that we are going to need to do, but I think these are very important actions that we need to have underway.
First, capabilities: The government customer must make focused decisions about what capabilities are key to the long term security of the nation. And then they must work with industry to create approaches that drive the continued evolution of that capability. A good example is aircraft design. Once the Joint Strike Fighter program completes testing, America will not have any large-scale, DoD manned aircraft design programs under development or even on the horizon. This is an unprecedented situation. In comparison, in the 1950s, the United States initiated 45 new aircraft programs. Perhaps there will eventually be a long-range strike program. But what will the aircraft designers do until that program comes along?
There are many other examples across the industry where a lack of new start programs would have devastating consequences on the base’s resources of human capital. Speaking as an engineer, for many critical skills, there is no substitute for actually building something. If we don’t have new projects, those skill areas will atrophy – and reacquiring these skills will, at a minimum, take time and cost money – if indeed it is doable at all in the future. And on top of that, in some key disciplines, more than 50% of the industry’s current engineering population is retirement eligible today, or soon will be eligible, so a fairly rapid decline in capability is conceivable if there are not investments made to preserve those capabilities.
To continue with the aircraft example, if aircraft design is seen to be important to our future – and to my mind, it most certainly is – the customer should decide to invest in a few reasonably advanced designs that will enable us to move out quickly if an advantage is needed. And they don’t have to be manned aircraft – we should stretch our innovation if we are investing for that purpose.
The second thing we can do to mitigate the risks to the industrial base involves reshaping export control.
Much of our capability can be maintained and expanded by lifting the export shackles off of American defense companies. To rely on technological superiority as a strategy, we must maintain those things that truly make us superior. However, with regard to export control, we have for years made the perfect the enemy of the good. We have been so focused on protecting our technological edge that we have actually done severe and unnecessary damage to our defense industrial base.
Case in point: satellites. Years ago, we were so concerned about others gaining the “force multiplier” benefit of satellite communications that we essentially made it impossible for U.S. companies to sell communications satellites to our allies. We somehow thought that we had a corner on that technology, but we were badly mistaken. The very policies that were intended to keep this technology secure for us actually encouraged others who could not buy it from us to develop their own. In fact, they even marketed their products as “ITAR free”. America lost valuable export opportunities and we are no safer as a result.
The rules have become ill defined and are not cohesive. If you deal with the export regime ever day, it is a challenge to navigate your way through the process. For example, last year we were denied the ability to export upgrades to F-16 radars that would have provided less capability than those on the F-35. The F-35 radars were approved for numerous coalition partners several years ago.
And we are still struggling to sell unmanned aircraft to allies. In a repeat of the satellite example, the thinking seems to be that our allies will neither build their own, nor buy them from those who will be motivated, by the perversity of our policies, to build them themselves.
Secretary Gates is promoting what is clearly the best policy – build higher walls around fewer things. His primary motive for such a reform makes eminent sense: to better support our allies, and to codify the technology sharing that occurs every day on the battlefield and in the joint training we perform. However, I think the Secretary’s reform initiative should also be promoted for reasons of sustaining the industrial base. By broadening the international market for our base’s high-tech products, the Secretary’s reforms will translate directly into the preservation and expansion of our nation’s critically important high-tech workforce. By strengthening the defense industrial base, the Secretary’s export reforms would keep us safer for the long term.
As I said earlier, the policy decisions we take in the near term have substantial consequences for the future health of this precious national resource known as the defense industrial base. I am optimistic that these decisions will swing in the right direction – a direction that will revitalize the innovation and safeguard the workers upon whom our nation’s security depends.
I am optimistic because our government customer has already committed to one of these two things. They are pursuing the reform of our export control policies. We are just at the very beginnings of this and we have a lot of work yet to do to be successful in those reforms, but I see the energy, determination and focus to get us there.
And the other critical task – the identification and funding of key capabilities – is a natural process for the Government to undertake if there is clarity around the policy objectives. These are not the only actions required to move us forward, but they are two very actionable approaches to push us in the right direction.
The other reason I am optimistic is because the alternative is so clearly – at least to me – at odds with the nation’s interests. Without an aggressive push to manage the industrial base as a strategic asset, we could potentially experience outcomes similar to what we saw in the 1990s – massive waves of talent departures; consolidation of companies driven by a focus on cost synergies instead of innovation synergies, and the loss of competition and innovation that implies; and investor reluctance to channel capital toward the defense industry.
I don’t believe that this is the outcome that will serve America’s interests, and I believe that our government leaders who are entrusted with protecting the security of our nation and its allies, feel the same way. The very proactive approach adopted by the DoD’s acquisition team, under the leadership of Ash Carter, to engage the industrial base, reinforces this perspective. I am optimistic we will proactively choose the better direction – one that will let us continue to provide our service men and women with the tools and capabilities they need to keep us secure in a world that grows ever more dangerous.