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.”