| 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. -30- 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. -30- - David Tortorano Feb. 9, 2021 |
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