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Unpredictable Pentagon Spending Causing Vendors to Leave Marketplace; Research and Development Stagnant

Congressional spending has become so unpredictable, a panel of Pentagon experts said the defense industrial base is shrinking and the weapons systems of tomorrow are not being developed today.

Speaking Monday at the Washington-based Center for Strategic and International Studies (CSIS), a panel of experts responded to the findings of a report quantifying how defense spending cuts, enacted by the Budget Control Act of 2011, has caused a dramatic number of defense industry suppliers to leave the market while chilling industry’s research and development activities.

“Though the defense budget had been declining in the years leading up to sequestration in FY 2013, the enactment of sequestration and budget caps marked a severe market shock that had a considerable impact on the defense industry,” said the report, co-produced by CSIS and the Aerospace Industries Association, and released in late December.

With less defense spending, the CSIS report found fewer contracts were being awarded. Before the Budget Control Act of 2011 fully took effect, the average annual number of DoD contract obligations in fiscal years 2011 and 2012 only dipped by five percent when compared to fiscal years 2009 and 2010. After 2013, defense obligations dropped by 23 percent.

Between 2009 and 2015, the report found spending cuts caused the total number of prime defense industry vendors to drop by roughly 20 percent, or about 17,000 vendors.

The cyclical nature of department budgeting, including delays in getting new spending approved, is a problem for all but the largest vendors, said Eric Chewning, deputy assistant secretary of Defense for manufacturing and industrial base policy, as a member of the panel discussion.

With annual unsteady funding, Chewning said the department has been unable to “send demand signals to industry.”

“The reality is that the Defense Department does not exist for the purpose of taking care of the industrial base. it’s the other way around, said Frank Kendall, former undersecretary of Defense. “So, what the Department of Defense has to do is to ensure, to the extent that it can while doing its mission, that there is a healthy industrial base to support it.”

What’s happened, though, is the department has not done enough to support industry, according to findings in the CSIS report. Each service branch sets its own priorities for spending, resulting in some programs are essentially ignored.

In the Navy’s case, the report found contracts for aircraft, ordnance, and missiles were prioritized, “at the expense of more severe cuts in facilities and construction, land Vehicles, air and missile defense, and space systems.”

Department-wide, the worst-funded programs were related to land vehicles – such as those used primarily by the Army but also the Marine Corps. Land vehicle spending dropped by 56 percent, near $30 billion in 2011 to less than $15 billion in 2015, according to the CSIS report. Funding for research and development activities at the largest defense industry firms has also been slashed.

Kendall said research and development funding started getting cut as the military focused its money on preserving force structure and readiness. Funding the new product pipeline was not a priority.

“In terms of keeping the industrial base healthy, our design teams our capabilities to build cutting-edge, state-of-the-art, ten-years beyond state-of-the-art programs is essential in great power competition,” Kendall said. “And it’s been allowed atrophy too much.”

  • kye154

    DoD Research and Development has been stagnant for far longer than this article indicates. DoD had reduced R&D substantially over the years, starting back in the 2001-2003 time frame, and R&D has never picked up since. Much of the funding for R&D was syphoned off to pay for our wars in the Middle East, along with trying to get that crappy F-35 off the ground, by throwing more money at it. If DoD is making bigger slashes in the remaining R&D now, it says a lot about DoD mismanaged priorities, lack of direction, and waste of resources. Any wonder why DoD is having problems convincing congress for more funding?

  • Leatherstocking

    Sequestration has caused many small vendors to leave the market. With reduced R&D investment, engineering staff is smaller (mine is less than 50% of pre-sequestration) and with reduced revenues and deep R&D cuts, we can’t staff for peaks or urgent demands when there is a problem in the field. ITAR restrictions makes all of us weak while our European competitors sell to a much larger market. Once you finish a classified job if there is no follow-on R&D, everyone loses their clearances and the company cannot bid on follow-on work because we can’t even read the procurement specs. I now have a steady stream of requests from DoD activities to build old items where the vendor has ceased operation. Even if DoD has drawings (and many of these are incomplete), there are no jigs, process procedures, test docs or special test equipment to create a few items – not to mention obsolete parts purchased by India or China when the old manufacturer went out of the business. DoD has found an almost-perfect way to destroy the lower tiers of their industrial base.

  • johnbull

    Very chilling article, and timely as well considering the current budgetary morass we’re in.

  • JohnQTaxPayer66

    While the small business people in the government are really just terrific and doing everything they can to help, it is nearly impossible to be a small business and get new tech into the DoD. It’s simply a process exclusively designed for large defense contractors who have pockets deep enough to participate. The potential buyers are so used to this large defense contractor type level of product development support, when a small business shows up who doesn’t have the money to cater to that level they discarded as probably not viable.

    Small business ends up selling off the tech to the big DoD contractor at a huge discount who pulls it in and by the time they are done getting it through it’s more expensive R&D process and padding the price with it’s giant defense contractor overhead they pay 5x more for the product than if they had just said these small business guys are on to something let’s work with them. The Requirements folks want the big defense contractors, I mean it logical in thier eyes, they think it’s less risk, it’s deep pockets. It’s especially risky for them when they can’t rely on Congress to fund thier budgets. Really small businesses can’t afford to play this game and everyone is losing including the tax payer.

  • RobM1981

    I’m a bit stunned to hear anyone imply that our Congress is anything but Fiscally Responsible.

    You think this is bad? Wait until the debt can’t be ignored any longer.

    We are still at a point where a balanced budget could eliminate the debt. it would take decades, given how the debt is structured, but it can be done.

    A shock to the system, like inflation that would require some significant raising of the prime, could cause mayhem. We are past the point of being able to easily handle these kinds of shocks. That’s how these things erode – over time. Flexibility is lost, as options are removed from the table.

    For those of you old enough to remember, our prime has been “double digits” in many of our lifetimes. Happened during the Reagan administration, with a Fed Chairman named Paul Volcker, and it worked. It wasn’t painless, by any means.

    Today? That approach would be devastating. It would be so bad, in fact, that it’s hard to even view it as an option anymore. Like I said, you lose options.

    The longer we kick the can down the road, the less flexibility we have. Spending won’t have to be capped; it will have to be cut. Spending won’t have to be cut; it will have to be slashed. Spending won’t have to be slashed; it will have to be funded with printed money…

    This will snowball, and not in a good way. Printing money is not the answer,.

    As goes the deficit and debt, so goes the military. Sequestration is mild, compared to what we are facing.

    If vendors are leaving now…? Hang onto your seats. it’s going to be a bumpy ride.

  • Curtis Conway

    “The reality is that the Defense Department does not exist for the purpose of taking care of the industrial base. it’s the other way around…”

    Are you listening Military Industrial Complex?!

  • Chesapeakeguy

    With a Defense budget that consumes the better part of a TRILLION dollars, I’m not overly sympathetic. One thing that cannot be denied, regardless of which party is in the White House, or which one controls the Congress, is how inefficient practices are forced on the Defense industry by those who have the oversight of it. There is plenty of money to do what is needed, but we know that there is a fair amount of that ‘corporate welfare’ within the DoD budget just like there is in all other aspects of government spending. Vendors come and go in all aspects of contracting with the government. If 17,000 represents the number that no longer are involved with DoD spending, and that number represents 20% of the vendors and contractors doing such business, it appears to me that the ‘base’ is very well populated. Ups and downs in military spending are a constant. So is the stupidity of those we put in office.

    • Zorcon, Fidei Defensor

      The key word here is small vendors?

      • Chesapeakeguy

        And so….what? Do the math. If 17,000 represents 20% of the total number of vendors, that means no less than 58,000 remained. I’m confident more have entered into the government contractor/vendor business since then, and the vast majority of them are ‘small vendors’. So, what exactly is the problem as you see it?

  • SamIam

    no more small vendors, that’s great news for the almighty Lockmart-Duenee will be pleased