DoD is looking for new ways to bring commercial innovation into national security

Guest:	Scott Davis
Title:	President, Michigan Chapter of the National Defense Industrial Association
Summary:	Building military capability takes more than defense contractors alone. Increasingly, the Pentagon is looking to commercial manufacturers, technology firms and other nontraditional partners to expand the defense industrial base. That's a topic drawing growing attention across the defense community, and my next guest says Michigan is becoming a focal point for that shift.

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Interview transcript

Terry Gerton We are hearing a lot from the Pentagon these days about their concern about the defense industrial base. You have a lot of experience there. From your perspective, what’s maybe changed recently that is bringing this issue back to the forefront?

Scott Davis Well, Terry, I think there are some obvious things that first and foremost, you know, strategically in the national defense strategy, we’re moving more toward the Indo-PACOM region as the facing threat. And I think also we’ve seen an evolution in warfare as we’ve observed Ukraine and Russia. So, there’s a number of things that come along with that. We saw proliferation of drones, rapid innovation that leverages commercial technologies, as well as tactics that I think we didn’t anticipate in response to those things. So over the last several years, probably last decade or two, we’ve seen a shrinking of the defense supply base, a lot of mergers, acquisitions, or companies that are exiting and moving to other products. And so additionally, I think just in the last few years, we’ve seen some pretty wild swings in priorities that are reflected in the defense appropriations budgets, which, you know, keep people guessing a little bit. So I think those are some of the big pressure points. And I also, you with the administration and some of things they’re looking to do, there is a push towards more commercial. And I think there’s a dichotomy now between traditional OEMs who demonstrably have built the finest military in the world and then perhaps maybe a bit of an over rotation of commercial priorities. And so I think those are really the key things that are pushing hard on the industrial base and I would tell your audience our national organization publishes annually something called Vital Signs, which is a very lengthy document but good summaries that really address the pressures that they hear from industry, defense-related industry folks on industrial-based challenges.

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Terry Gerton Well, you’re the new president of NDIA’s Michigan chapter, and that chapter talks about Michigan as the modern arsenal of democracy. As you’re describing the industrial base ecosystem just there in your last response, what is it that makes Michigan and that region so important to defense today?

Scott Davis That’s a great question. So I think it’s partly our long history. So, I think as you all recall, Michigan was really the hub of the arsenal of democracy leading up to World War II. And, you know, it was the leverage of the technology, innovation and manufacturing prowess of the automotive industry that primarily put it here. But it’s also driving significant advancements, the auto industry today in advanced manufacturing technologies which have direct applicability to military production. And you know just if you think about Michigan, a lot of times we think about just ground and ground is still a significant component and primarily because it has the similarities with the auto industry and the technologies and manufacturing that they do. But I think even more so with automotive moving more towards digitized and electrified platforms, we’re seeing even a greater parallel between the two industries and where we can share and different things across. But I would be remiss because one of the things as the new NDIA president, you know, a lot of it is to our industry, follow the money. And I think, as we all know, ground has shifted in investment down a bit to space and aerospace and in maritime and so in terms of maritime, one of the things we’re working with our members on is, one they can leverage our manufacturing technologies and advanced technologies but we also have I think the largest sort of protected body of deep water in the country and maybe the world. And so it provides a great opportunity if we want to move some more maritime things here for both development manufacturer but testing. And I didn’t know, or I guess I knew but I didn’t think about it when I was at a recent conference, there’s parts of Lake Superior that drop off to a thousand feet deep, a very short distance off the north coast of the Upper Peninsula. So, you know, lots of possibilities there. And then on the air component, particularly UAVs, the Camp Grayling facility has been recognized as the national all-domain war fighting center. And they’re designated as a Department of War national drone test site. So lots of things going on in Michigan and really looking forward to helping our industry partners get through some of that.

Terry Gerton Scott Davis is president of the NDIA Michigan chapter. Scott, you were talking there about the automotive manufacturing world in Michigan and how it might be more broadly applicable, but the commercial world there and the defense world move at very different speeds. What is the biggest obstacle to getting commercial innovation into military vehicles and logistic systems?

Scott Davis So I really think the whole question revolves around business models. And you know, I tell people that aren’t familiar with military, military is a fickle buyer and on the ground vehicle side, the army has historically only followed through on 60% of the projects that they say they want, but actually get into production. And so I think that’s a challenge that some of the commercial side will deal with. The other thing is this differentiation between commercial business models and defense. So commercial, they use a lot of internal investment to bring products to market, but then usually don’t share the IP, which the Department of Defense wants. And they target profits at above 30%, you know, just some examples, Anduril’s at 40 to 45%, Google 30%, SpaceX 35%. And if you look at defense, historically the government has funded that R&D, and in exchange gets all the intellectual property from those developments. And because it was a low, they took the high risk pieces off, traditional defense only netted 8 to 12% return on sales, limited primarily by FAR. So I think there’s been some attempts to mix the two business models, and I think that’s inappropriate. And so I think the Department of War has to rationalize which kind of business model are they more willing to accept or figure out they’re going to run two of them and how do you blend them together I think is really key. And then the last thing I would say is most of the OEMs outsource 70 to 75 percent of the content of all the major systems we build, tanks, Bradleys, helicopters. And so figuring out a way to get those innovators connected to those OEM integrators in a more rapid fashion I think will accelerate the innovation on those platforms.

Terry Gerton You make a really important point there. The Pentagon seems to be looking beyond the traditional defense sector and looking to bring in maybe small companies, innovative companies who’ve never done defense work before. Some of that is through venture capital even. How do you see that playing out, especially in the Michigan economy?

Scott Davis Well, you know, I think it’s going to be interesting, and I mentioned the vital signs, but there’s a whole segment in there on capital and where it comes from in venture capital. And it’s, I think the one big barrier for the venture capital folks is really that understanding, because I always tell everybody when I was running all of the combat programs in BAE Systems, it’s an equation, the (P)go x (P)win. We already talked about the P(go). At least on the Army ground side, 60-ish percent. And if, you know, your (P)win is usually based on what your competitors are likely to do. And so, you know, generally that number, that calculation comes out to 20 percent or so of things that get started, actually go and you win, right? So I think that’s going to be a challenge for any company, not just Michigan companies as we move forward. But, you know, I think that’s really key.

Terry Gerton And as you look forward two, three, four or five years from now, what will you be hoping to see to tell you that this collaboration around the industrial base effort and maybe the Michigan market has really played out?

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Scott Davis I think the key sort of things that you’d be looking for is, are we seeing commercial solutions being fielded for unique capabilities and, you know, I went back and said this big push for commercial is a good thing in my opinion, but we’re not going to buy any commercial aircraft carriers or fighter jets or tanks anytime soon. And so it’s really understanding where is it that we can use commercial systems that are end items, but oftentimes we have to make a lot of compromises, right? They probably don’t have nuclear hardness. They probably aren’t chemical decontamination safe. They’re not gonna meet all the environmentals that we have do. So I think it’s those kinds of things. So are we seeing them? Then the second thing I think is do we see more commercially derived technologies appear on our existing prime combat platforms? And then would we see some pre-planned defense and commercial manufacturing partnerships with some capital investment so that if we need a surge, we have already thought our way through that, and we’re not starting from scratch. And, you know, there’s a book, again, that I would recommend if anybody hasn’t read Freedom’s Forge, it’s really about, you know, that pre-World War II time. And when you get to about chapter four, the parallels with where we are today are incredible. And then I think the last time, you know, balance the peacetime capacity that we can afford because that’s usually where we’re designed around to a capacity that’s ready should we need it. And I think that’s gonna take some hard discussions and capital investment to sort of create that balance. But I think that’s really the key.

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