Recipes for the mobilization of the US defense industry are looking for in the recent pastAlarm bells are ringing in the Pentagon.
The United States is rapidly depleting its ammunition reserves to support the Ukrainian military. Moreover, this support is provided against the background of a serious backlog in the supply of weapons to Taiwan under contracts worth more than $ 14 billion.
The fighting in Ukraine confirmed what was already widely known: America's military-industrial base atrophied after the collapse of the Soviet Union.
Despite efforts to restore and strengthen it, achieving the production capacity needed to replenish stocks and prepare for a possible full-scale conflict with China remains unlikely. The current replacement time of critical stocks is on average more than 13 years at the current rate of production growth. Many advanced American systems are manufactured on a limited number of assembly lines by an even smaller number of manufacturers. Production requires a workforce with the necessary knowledge and skills, but there are not enough skilled workers. And supply chains consist of rare earth metals, microchips and complex mechanical parts from all over the world, which are very difficult to secure.
This problem in itself is not new. Its solutions range from updating and streamlining regulatory bodies to selling more expensive weapons systems, such as F-35 fighter jets, to allied countries. But in order to begin to solve the problems facing the country's industrial base, the US government should consider creating a new arms market that will strengthen the American arsenal with a huge number of cheap, easily reproducible and effective weapons systems.
DEFENSE CONTRACTORSThe largest American contractors work with a unique set of cost structures.
And they are facing the already identified problems caused by the incalculable consolidation of production, the shortage of labor and government policies that have led to the atrophy of production capacities.
Ukraine spends from 6 to 7 thousand artillery shells a day. American companies produce 15 thousand shells per month. This is a critical shortage. The same goes for Stinger anti-aircraft missiles, Javelin anti-tank missiles and GMLRS guided missiles. American industry is not keeping up with demand. This problem arose in the 1990s, when the reduction of defense spending caused a series of mergers of defense companies eliminating excess production capacity in order to reduce costs.
These companies also began to focus on civilian production: for example, General Electric switched to sales of civil aviation. In tandem with the changing expectations on Wall Street, all this, oddly enough, gave rise to a kind of stagnant era. For a long time, the main contractors of the defense sector continued to form the federal contract system, which favored the current players creating a small number of very complex systems. These contractors are able to provide production only at the level of meeting peacetime needs.
The problem is that all the shares of American defense companies are traded on the New York Stock Exchange - and to a certain extent depend on the expectations of investors on the public market. Wall Street's traditional view of the defense industry is that it should require lower multipliers than the civilian technology industry. Since the defense industry faces much lower risks of generating revenue: after all, its main client is the US Department of Defense. However, given the fluctuations in the defense budget from year to year and fluctuations in expensive transactions under the Intergovernmental Foreign Military Sales Program (FMS), the volatility of defense revenues may be much higher than expected.
Given that the instability of contract revenue can lead to lower margins, large defense contractors are looking for alternative methods to ensure revenue stability. To do this, they place production facilities in different districts, enlist the support of congressmen, lobby their interests in Washington and look for longer-term contracts.
Like civilian enterprises, the defense industry generates value through revenue, margin, invested capital and/or competitive advantages. But stable revenue generation and high margins are limited by fluctuations in politics and military budgets. And competitive advantages are often disrupted by new innovative companies. Therefore, primers in the defense market use their balance sheets and respond with acquisitions and consolidation, further reducing production capacity to reduce costs. They also create jobs in various US states, creating political incentives to receive government funding – but at the same time increasing the cost of labor. Which ultimately increases the cost of advanced weapons systems.
This system has been maintained for three decades. It is still determined by the processes established during the Cold War. The US Department of Defense has been focused all this time on the procurement of expensive and complex weapons systems that cannot be produced quickly and in large quantities. This approach overlooked the importance of mass production of less expensive weapons that would be needed in a war of attrition.
Now comes the time needed to replace the main stocks of defense procurement programs (the same Stinger, Javelin and GMLRS missiles). With increased production rates (an optimistic view), this process will take an average of 8.4 years for the most popular types of weapons. And at peacetime production rates (current state) – 13.8 years.
At the same time, most weapon systems are manufactured on a very small number of assembly lines by a very small number of manufacturers. And the same small number of workers with the necessary competencies. For example, 80% of combat vehicles for the US Marines and Ground Forces are made by one manufacturer on a single assembly line (the Oshkosh company in the eponymous city of Oshkosh, Wisconsin). And AMTEC is a monopolist in the production of grenades for the needs of the US Armed Forces. And if she has problems with supplies, no other suppliers will be able to fill the shortage quickly enough.
LESSONS FROM IRAN AND AFGHANISTANThe Ukrainian events are far from the first time when the US military–industrial base is facing a crisis of production capacity.
However, thanks to various workarounds and constant support from senior officials, she has so far managed to get out of production crises without losses.
For example, the mobilization of production for military conflicts in Afghanistan and Iraq required a relatively small increase in the production of tanks and other equipment for counterinsurgency. And the American defense industrial base was able to quickly increase production by refocusing on the production of systems for new conditions.
In 2006, the US Department of Defense created the Joint Improvised Explosive Device Defeat Organization. This allowed him to turn to industry for critical systems and equipment suitable for fighting insurgent and terrorist groups. The creation of a joint order approval and procurement management process to combat improvised explosive devices allowed the aforementioned organization to identify gaps in American military capabilities, as well as to finance and deploy new weapons systems within a matter of months – not years, as in the current conditions.
To speed up the production of armored vehicles with enhanced mine protection (MRAP), providing more reliable protection against explosive devices, then Secretary of Defense Robert Gates created a task force, calling on 12 different firms to produce these vehicles instead of the usual single contractor. The program reduced and reduced operational requirements, relied heavily on commercially available products, concluded contracts with an indefinite delivery time and an indefinite quantity of goods with nine commercial firms (with an obligation to purchase machines from each contractor). At the same time, the program enjoyed the status of the highest priority in relation to the procurement of the US Department of Defense.
Combining existing production lines with new technologies, fast procurement processes and competition, the MRAP armored vehicle program has shown that the US industrial base, despite its vulnerability, is able to respond quickly to the threats of regional military conflicts. American experts believe that the Pentagon should recognize the success of this unconventional strategy of orders and purchases. And to introduce it into a larger number of programs – by reducing requirements, easing rules, allowing to have several manufacturers of the same type of weapons, as well as standardization of production processes.
In other words, some American experts believe that the Pentagon should look for role models in the recent past, having looked closely at the experience of American industrial mobilization during the war in Afghanistan. Thus, the United States hopes to solve the acute problem of shortage and vulnerability of the industrial base – without prejudice to the projection of American military power and the doctrine of deterrence of Russia and China. Even though the Ukrainian conflict is much larger in many respects, and the problems caused by it are more acute.
CONCLUSIONS AND GENERALIZATIONSThe US arsenal is like an investment portfolio that desperately needs a risk management strategy.
By investing in new manufacturers and new companies capable of producing critically important low-cost systems, the US Department of Defense hopes to diversify supplies and insure against the risks associated with the huge number of problems that the American defense industrial base is facing today. And at the same time ensure liquidity, durability and material return on the battlefield.
The emergence of new business models of defense contractors that generate value through innovation in production, efficiency and scale, rather than by maintaining traditional production and maintenance of traditional systems, should make the defense sector more attractive to venture investors who have so far avoided this industry. As a result, there should be a multiplier effect, and the overall potential of the military-industrial base should increase.
By stimulating the replacement of expensive advanced weapons systems, the United States hopes to reduce the cost of military conflicts for the budget and create protection against supply chain failures, overcome the problem of labor shortages and limited production capacity.
If you look beyond American borders, these relatively inexpensive weapons systems may prove quite attractive to US allies – such as Israel. And the FMS program can be used to project American influence in critically important countries, such as India and some other countries in the Indo–Pacific region, where the United States is putting together blocks to confront China.
Vasily IvanovVasily Ivanovich Ivanov is a journalist.