Implementation Essential for Industrial Strategy

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The Defense Department Jan. 11 released the first-ever National Defense Industrial Strategy, which rightfully identifies the defense industrial base as a significant contributor to the nation’s military readiness.

It recognizes that the health and resiliency of the industrial base directly impacts the nation’s ability to successfully support warfighters, allies, partners and U.S. values abroad.

In doing so, the strategy largely hewed to the same issues and recommended actions industry and its advocates —including the National Defense Industrial Association — have also identified as critical areas to address.

Building resilient supply chains, workforce readiness, flexible acquisition and economic deterrence are admirable aims supported across industry.

Absent from the strategy, however, are the specific means and ways the Pentagon will accomplish its stated goals for industry and the formal metrics for success beyond illustrative outcomes.

The department plans to detail these elements throughout 2024 via an unclassified operational annex and a classified implementation plan.

If the strategy is to successfully “catalyze generational rather than incremental change in order for our industrial base to meet the strategic moment,” implementation must focus on securing adequate and reliable resourcing and introduce metrics that incentivize industry behavior.

When reading the strategy, two questions come to mind for industry: who is paying, and what are they paying for? Put another way, will the burden to fund implementation fall on the government or industry?

In the forthcoming implementation plan and operational annex, defense officials should seriously consider identifying how they plan to pay for the programs, incentives and actions detailed in the strategy. Industry expects resourcing will be split between government funding and industrial investments. By clearly indicating how it plans to resource the strategy during the implementation phase, the department can help industry prepare for the impacts of the strategy’s implemented actions.

These demand signals will enable industry to forecast the investments and economic decisions that companies will need to make to adhere to government desires while remaining competitive in the defense market.

Even if the intention is for the government to fully fund implementation, the Defense Department should also plan for a future where they may not receive the necessary funding from Congress. This is particularly true given the budget process’s enduring instability. Congress has been unable to reliably pass a defense spending bill — or any funding bill — on time and has instead relied on continuing resolutions for 14 of the last 15 years.

One of the impacts of this pattern is reduced confidence in the federal government’s ability and discipline to reliably fund long-term contracts and initiatives, such as the ones proposed in the strategy.

Companies make rational business decisions based on risk and future expectations. The current level of budget instability displayed by the government does not engender confidence that they can rely on continued funding to support the industrial investments spelled out in the strategy.

In turn, without guaranteed, reliable funding, companies will not be properly incentivized to make the investments and other economic decisions needed to support the department’s needs.

The United States does not have a command economy with state-owned companies like authoritarian adversaries abroad. Instead, the free market system trades direct control for the efficiency, innovation and vigor brought about by market competition. Market freedom is one of the key strengths of the U.S. industrial base over its near-peer rivals.

The strategy’s framers agree. The National Defense Industrial Strategy notes that “failure to promote competition, especially at home, could also lead to slower technological advancements, quality issues and even the loss of our technological edge in key areas.” The Defense Department has an opportunity during the strategy’s implementation to be more specific about the steps the executive branch itself can take to improve this situation.

The ability to attract investors and resource capital also informs the actions of defense contractors. In today’s economy, investors are prioritizing companies with streamlined costs and the opportunity for large profit margins. This is a different mindset than in the past that prioritized the sure, steady, but lower profit margin that defense contractors can garner under government oversight.

In this environment, both the Defense Department and Congress need to be cognizant of the pressures defense companies are under to raise capital.

There remains one buyer in the defense market — the U.S. government — which maintains a special level of influence over industry’s actions.

The department should recognize the true economic realities facing industry as it implements the strategy.

If the department wants industry to balance the demands from its customer and from investors — such as encouraging investment in excess capacity — it will need to establish clear metrics and incentives to allow companies to shift in the desired direction.

The Defense Department can avoid pitfalls and ensure the successful implementation of the strategy by bringing industry into the fold early in the process, which industry is eager to do.

By relying on industry experts and by treating industry as partners to build the implementation, the department can achieve the goals of the nation’s first National Defense Industrial Strategy and build an industrial base more than ready to support a new era of great power competition. ND

Chris Sax is the National Defense Industrial Association’s associate director for strategy.

Topics: Defense Department