Still leading, but risks acute

The United States military and the nation’s defense companies are still  
global leaders, but unless changes are made the U.S. faces a growing,
perhaps permanent, security deficit.


For the Gulf Coast I-10 region, an area of the country that builds aircraft,
spacecraft, ships, electronics and more, a report that provides a snapshot of the
health of U.S. industrial might is bound to be of high interest.
The Fiscal Year 2020 Industrial Capabilities Report released last month does just
that. It notes that the American military is still the world’s most powerful, its defense
companies still global leaders in weapons innovation and production, and the
Department of Defense is still the single biggest buyer of goods in the U.S.
government.
“But unless the industrial and manufacturing base that develops and builds those
goods modernizes and adjusts to the world’s new geopolitical and economic realities,
America will face a growing and likely permanent national security deficit,” the report
says.
The report points out that advanced technologies, seen by many as the way to
preserve American leadership, also rely on the manufacturing complex.
It recommends a defense industrial strategy based on re-shoring the defense
industrial base and supply chain, building a modern manufacturing and engineering
workforce and research and development base, modernizing the defense acquisition
process, and finding new ways to partner private sector innovation with public sector
resources and demand.
Major trends impact the health of the industry. One is the steady deindustrialization
of the United States over five decades, from 40 percent of GDP in the 1960s to less
than 12 percent today. Another was the end of the Cold War and the resulting shift
from defending against a peer, state adversary to fighting terrorism. But the reality of
a surging, militant China and still dangerous Russia is now apparent. Another broad
trend is the widespread use of advanced technologies, driving the global economy
but also posing new threats to security both in the public and private sectors.
The report concludes that the United States defense industrial base has reached an
inflection point regarding the balance between its vulnerabilities and its opportunities
for modernization and reform.
Some might say restoring the nation’s defense industrial and manufacturing base
dominance will require nothing less than a miracle. But the United States and its
military have shown the resolve to produce miracles is deeply steeped in U.S. history.
Ambitious policies require a willingness to make strategic decisions, like recognizing
that what worked in the past may not work in the future. The report says consensus
is growing across political lines on the need to reshore critical industries, create
American jobs, and counter the China challenge.
The requirement that the federal government guide and direct the nation’s industrial
future, including its defense needs, is part and parcel of the American tradition, says
the report.
In his Report on Manufactures published in 1791, Secretary of the Treasury
Alexander Hamilton urged Congress to promote America’s industrial base so that the
United States could be “independent on foreign nations for military and other
essential supplies.”
In addition to protecting national independence, support for manufacturing
incentives for emerging industries would level the playing field in the global markets
of the day.

- David Tortorano
Feb. 9, 2021


Buy American - again
President Biden signed an executive action on Jan. 25 that administration officials
say will close loopholes in federal government “Buy American” policies.
The order creates a new position in the White House's budget office that will
oversee the implementation of “Buy American” provisions, and the president will direct
a review of waivers for these rules.
The order reflects the shifting consensus in American politics away from free trade
and toward direct government intervention to promote U.S. manufacturers, a position
Trump embraced as well.
Major U.S. allies oppose Buy American efforts, fearing the loss of lucrative contracts.

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Key aerospace sectors

The report covers industries of high interest to the region, including aircraft, space,
cybersecurity, missiles/munitions, ships and more.
The two most closely linked to Gulf Coast aerospace are aircraft and space.

Aircraft
Prime contractors and suppliers often rely on revenues from both defense
customers and commercial customers, says the report.
Commercial aviation customers typically bring in large-volume orders and stable
demand forecasts over longer terms than do government purchases.
Thus demand from commercial customers is essential to sustain manufacturers and
suppliers within the defense industrial base.
In 2019 the aircraft sector was one of the strongest with growing commercial
demand and stable defense demands, but two events in 2020 changed everything.
One was the production halt in January of the Boeing 737 Max after two deadly
crashes. The other was the pandemic, which disrupted the supply chain with
shutdowns, absentees, and furloughs. Air travel took a huge hit worldwide.
Matt Coughlin, executive director of Pensacola International Airport, said that
although Pensacola is down from pre-pandemic numbers, the passenger counts
locally are relatively robust in comparison to the national numbers showing a
decrease of 60 to 65 percent across the system as compared to one year ago.
Many industry experts anticipate it will take at least three to five years for the airline
industry to return to pre-COVID global passenger traffic.
Due to the downturn of the commercial aviation, suppliers may choose to downsize
capacity by closing facilities or not operating equipment and machines, the report
says.
This in turn can potentially create supply chain bottlenecks, especially when airline
passenger traffic numbers improve and the aircraft original equipment manufacturers
start increasing order quantities again.

Space
Demand for space capabilities and services, and resulting capability development, is
increasingly driven by foreign and domestic commercial markets, says the report.
The U.S. is in the fortunate position of being the overall world leader in commercial
space, but near peer competitors such as China are rapidly expanding their
commercial space industrial bases.
But certain National Security Space Mission requirements are unique and require
support outside the growing commercial sector.
The DoD, in coordination with other federal agencies, including NASA, will continue
to leverage, support, and promote the commercial space industry, where appropriate.
There are potential areas of support where the DoD and partner agencies can
positively help the U.S. commercial space industry. For example, recent economic
analysis by the U.S. Air Force Office of Commercial and Economic Analysis and the
MITRE Corporation highlight that government support of the launch industry, coupled
with commercial efforts to reduce space launch costs and increase reliability, is
effective in helping U.S. commercial launch service providers gain additional global
market share.
However, the U.S. government should simultaneously be aware of the likely
oversaturation of launch service providers, especially small launch providers, when
considering the foreseeable Total Addressable Market for space launch, the report
says.

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- David Tortorano
Feb. 9, 2021
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