New NDIA study gives defense industrial base health a ‘C’ grade

An inaugural NDIA report says defense industry is financially strong and generally competitive, but points to workforce, cybersecurity challenges.

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A new battery of tests that aims to assess the overall health of the defense industrial base over time reported a barely-passing “C” grade in the inaugural edition, issued Wednesday.

The report card — dubbed “Vital Signs” by analysts at the National Defense Industrial Association and Govini — is partly a follow-on response to a first-of-its-kind report the Pentagon issued in 2018. That assessment showed some worrisome signs about the defense industry, but was a snapshot in time. NDIA officials said policymakers need a more repeatable deep-dive to understand the key problems on an ongoing basis.

From a Wall Street perspective, the industry is in very good shape. Publicly-traded companies in the sector are profitable, and have historically-high amounts of cash on hand even though they’re spending heavily on new plants and equipment. On a scale of 0 to 100, the NDIA report scores those measures — collectively called “competition”  — at 96.

But that category is only one of eight in the report, and the picture is less rosy in many of the others.

For metrics of “production inputs,” including the cost of goods and services and the overall health of the defense industrial workforce, the sector earned a score of just 68. Within that, the lowest-scoring subcategories highlight concerns over security clearance delays and the overall size of the contracting workforce.

“The workforce piece is the one that’s concerning to just about everybody,” said Wesley Hallman, NDIA’s senior vice president of strategy and policy. “And importantly for the defense workforce, it has to not only have the skills and educational background to perform, but they’ve got to be able to get a security clearance. That challenge is going to take not just a whole of government, but a whole society, and requires investments now to see returns 20, 30 years in the future.”

IP theft investigations down but analysts not cheering yet

Another area of concern: industrial security, and particularly, the industry’s ability to deal with cybersecurity threats. The assessment rates the industrial base at just 17 out of 100 points when considering the severity of cyber vulnerabilities in the industrial sector, and 33 based on a count of the raw number of new threats.

Perhaps surprisingly, the report gives the DIB a score of 100 on the matter of intellectual property theft, mainly because steady law enforcement and diplomatic pressure against foreign governments have improved the situation. But the authors cautioned that doesn’t mean IP theft isn’t a major problem: rather, the high score mainly indicates that new FBI investigations into data exfiltration have fallen significantly from their all-time peak in 2011.

“We know what the Chinese are doing. We know they’re trying to steal IP,” said retired Air Force Gen. Hawk Carlisle, NDIA’s president and CEO. “There’s obviously two components. One is to steal IP, data, and plans, and the other half of it is [supply chain concerns] like the Huawei and ZTE thing. If they have an ability to put something in our military equipment that they can then use at a future date to harm the capability of that piece of equipment or that system, those are challenges as well.”

When it comes to innovation within the Defense industry, the report paints a mixed picture: The value of U.S. companies’ research and development earned a top score when it comes to durable goods, manufacturing, and IT. But they scored in the mid-30’s on measures of the value of their R&D in scientific fields.

Supply chain highs and lows

The health of the Defense industry supply chain was also a mixed bag. Companies got high scores for keeping their major programs on schedule and within budget, but did poorly on metrics of how often the Pentagon decides it needs to cancel underperforming contracts.

The report also pointed to potentially-worrying trends in the regulatory burden the government creates for defense contractors. NDIA calculates that metric based on how many regulations DoD creates that add burdens, compared to regulations which reduce them.

And despite the Trump Administration’s push for regulatory reform, Carlisle said the “red tape ratio” is worsening. In some ways, it’s run at cross-purposes with Congress’s own efforts to streamline the Defense acquisition process.

“In the desire by the executive branch to try to minimize regulations, the rule became you had to get rid of X number of regulations before you could bring new ones on. But the new laws required new regulations. So there was a little bit of a counterintuitive approach to how we get to the new regulations that allow [the acquisition process] to be easier,” he said. “We’re working on standing up an industrial caucus in the Congress, and they are listening. I think the department is working hard on regulatory reform, not only getting rid of excess regulations, but also bringing in the new laws with policies and regulations that make them executable.”

The report does not make any specific recommendations to either DoD or Congress for how to improve the industrial base’s health. NDIA says that even though it’s hoping it can report better scores in future years, the main objective is to keep a finger on the pulse of a wide variety of challenges year-over-year.

“We do this because we want the broader community to see this as a baseline for the discussion that we have on an annual basis: ‘What is that health and what do we need to do ensure it over time?’” Hallman said. “Given that we’ve moved from the post-Cold War era, where we had overwhelming U.S. preeminence, to where we’re now talking about peer and near peer competitors, that discussion should revolve around whether a C grade is good enough to compete.”

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