DoD top brass worried about supply chain amidst heavy spending, fewer prime contracts

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Talk about putting your eggs in one basket. The Department of Defense has been steadily spending more and more dollars with fewer and fewer prime contractors. Now the top brass and some members of Congress say they’re worried about a weak supply chain to support the military. Federal Drive with Tom Temin welcomed Senior Bloomberg reporter Travis Tritten, who has put all the numbers together.

Interview transcript:

Tom Temin: Travis, good to have you back.

Travis Tritten: Hey, thanks.

Tom Temin: So let’s run through the numbers. Where have the dollars been headed? What is the roster of primes and so on? Give us the overview here.

Travis Tritten: Sure, well, over the last decade, we’ve seen kind of this stunning decline in the number of prime vendors out there. A 36% decrease. And at the same time, as you’ve seen, the number of these two companies shrink dramatically. You’ve also seen the defense budget climb pretty significantly. Defense spending is up 18%. And what we’ve seen is that the bottom lines of companies is growing. A smaller pool of companies are getting a bigger piece of the Pentagon’s funding pie.

Tom Temin: And does this flow down to the roster of subcontractors as well?

Travis Tritten: Right? Well, I mean, there are also concerns farther down in the subcontractor supply chain. Thousands of companies out there, but that pool is also shrinking and it’s also considered to be weak.

Tom Temin: And is this because fewer companies are bidding, that fewer prime’s are getting contracts, or are there fewer companies out there to bid?

Travis Tritten: There are two trends that we are tracking, and they kind of feed on each other. The first one is, is that you have mergers and acquisitions. And you’ve seen a lot of these high profile mergers and acquisitions with large companies. You know, Lockheed is planning to acquire Aerojet Rocketdyne this year, which is a rocket engine builder. Each year, we’ve seen these larger companies gobbling up other companies, and that’s been happening amid the prime contractor. So you have a smaller group of more powerful companies with more resources to bid. And at the same time, you have these midsize and smaller companies that just don’t have that type of resources, it becomes very difficult for them to compete with these larger and more powerful companies for these Pentagon contracts.

Tom Temin: Yeah, and some of these products and requirements are pretty complex and highly technical. And there’s very few companies, I guess that can even fulfill them. And your article also quotes the Chairman of the Joint Chiefs of Staff General Hyten as calling the word you used the supply chain week. What does he mean by weak that is underpopulated, or also lacking in technical ability?

Travis Tritten: It’s both of those things, it’s shrinking. And we don’t have the indigenous, the domestic technical ability that we need as the military adopts these, like really cutting edge technologies, you know, like artificial intelligence. The military is trying to modernize and it needs this tech know-how what you find a lot in these midsize and smaller companies to accomplish this type of modernization. And they’re finding it harder and harder to get these companies on board. So it’s created a system that is weak, you don’t have the technical know-how and also you have fewer companies competing for contracts. So you don’t have the competition that keeps prices down. So taxpayers end up paying more for these contracts.

Tom Temin: And what about manufacturing technical competence? Because many of the hardware items that go into platforms, I’m thinking of like gyroscopic guidance systems, for example, highly precision, made of very sometimes exotic materials that you need to know how to handle and process and procure, and then grind to millionths of an inch and so on. Sometimes I’ve seen other sources saying that the U.S. capacity there is diminishing also.

Travis Tritten: Right. Yeah, I think manufacturing is really the hard problem of the defense industrial base. You saw the last acquisition chief as she was leaving, in January, she warned about the offshoring of U.S. manufacturing, right. And this is a huge long term trend. But we’ve lost a lot of these domestic abilities, these manufacturing capabilities. And it’s a really difficult problem, because it’s much greater than just the Pentagon. But the Pentagon obviously suffers greatly from that.

Tom Temin: We’re speaking with Travis Tritten, senior reporter for Bloomberg Government. And now Congress has taken notice, is there anything anyone proposes to do about it?

Travis Tritten: Yeah, so the House Armed Services Committee has created this task force. So there is this alarm that’s rising, and it created this eight member task force, it’s going to spend three months looking at this problem. And the goal here is to come up with legislation that can go into this year’s defense authorization bill. So they’re going to be looking a lot at the foreign supply chain. There may be some domestic legislation in there as well. But whatever they come up with, it has a very good chance of ending up in the Houses final version of the bill and potentially ending up in the final legislation of the pass at the end of the year. So there is a good chance that we may see some significant new legislation this year.

Tom Temin: And is there any evidence that this is important to the new administration, political appointees, for example, general, well, I want to say no longer general, former general, but Lloyd Austin, the secretary of defense?

Travis Tritten: Biden has his deputy defense secretary in place, Kathleen Hicks, and she has mentioned that she is concerned about the consolidation of the defense industrial base. One of the issues for the Biden administration though is they don’t have their top people in place yet. We’re still waiting for nominees, we’re waiting for a Pentagon acquisition chief to be named. And that’s really the point person in the department for these types of issues. So I would say that the administration at this point, their game plan isn’t fully formed at all. But I think this is going to be a pressing issue, and they’re going to need to get on it once they get somebody in place.

Tom Temin: And what we are expecting to be as flat budgets, will that have any effect on the situation?

Travis Tritten: Yeah, well, the flat budgets are always a challenge. I don’t think that it’s going to affect this trend that we’re seeing, I think that the trend is going to continue. I think it was accelerated by this increase in defense spending over the Trump administration. But I think we’re gonna see it continue, even if the budget is flat.

Tom Temin: And one of the just detail issues that you mentioned, which I think we’ve seen happening is the movement of silicon fabrication and chip making overseas. Silicon Valley is really software valley. I don’t know why they still call it Silicon Valley, for a variety of reasons. All the fabrication is moved out of there. And so is that one of the main areas I think that they’re looking at?

Travis Tritten: Oh, yeah, absolutely. And the reason that this is so concerning is because we depend on a lot of this stuff from China. And China is our main competitor, as the Pentagon always says it’s the pacing threat. So when you have your main competitor in the world, who has the capability of producing this stuff, and you’re dependent on it for your defense supply chain and puts you in a really difficult situation, strategically, that’s just untenable. It’s something that needs to be addressed. And like we’ve heard this rising alarm over that over China’s involvement in the supply chain.

Tom Temin: The Defense Department does have relatively small programs to foster manufacturing, workforce development, and to some degree engineering workforce development. But I think they’re more concerned about the manufacturing than they are about the engineering. But those are small, isolated, I don’t think they rise to the highest levels of the Pentagon’s attention. So do you predict we could see an expansion of that type of thing?

Travis Tritten: Yeah, you know, as we’ve seen, the pandemic became the most urgent issue for the Pentagon, but we’ve seen them use some of these levers for the defense industrial base. The Defense Production Act, they’ve been spending tens of millions of dollars on these companies to try to keep them afloat to keep them healthy. You know, this is specifically for the pandemic, and the pandemic exacerbated all of these issues that we’re talking about. But this may give them some ideas and some tools that they could employ post pandemic to try to keep the industrial base healthy.

Tom Temin: And the final question is any thought in this context of the procurement rules? Because I know in many of the innovation programs and cells in the Defense Department, they have been using OTA, trying to get away from the FAR to make less friction for would-be newcomers into the dib to have a pathway that must be still on the burner also.

Travis Tritten: Yeah, I mean, I think one of the most concerning things about this is that the Pentagon has known that this is an issue and they’ve been trying different things. You saw the last Pentagon Acquisition Chief Ellen Lord, she was very focused on this issue. And she had programs like the Trusted Capital Marketplace, which was this kind of pilot program that would take venture capitalists and try to match them with these smaller companies. So they really were trying to think outside the box to try to get at this problem. But the trend is very clear and some of these things that they’ve been trying like OTA’s. Maybe they’re not working as good as the Pentagon had hoped.

Tom Temin: Travis Tritten is a senior defense reporter for Bloomberg Government. Thanks so much.

Travis Tritten: Oh, thank you.

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