Navy: ‘Defense industrial base is fragile, less competitive, has limited growth opportunities’

Original Article: Washington Business Journal

The good news is the Navy’s acquisition chief doesn’t really blame the actual companies. The bad news is that his depiction of the state of the defense industrial base is pretty gloomy.

HON Sean Stackley, the Navy’s assistant secretary of research, development and acquisition, was one of three defense acquisition chiefs who testified Wednesday before the Senate Armed Services Committee’s readiness and management support panel about acquisition reform. He pointed to four factors in preventing program failures: more care taken to define requirements up front, a stable plan throughout the duration of the program, an experienced acquisition workforce, and a healthy industrial base.

It’s that latter component that seems far from the current reality, based on Stackley’s testimony.

“The difficult reality is today’s defense industrial base is fragile, less competitive, has limited U.S. growth opportunities, and continues to face an uncertain defense and national budget environment,” he said.

The result, he continued, is a somewhat smaller, less competitive defense industrial base compromised of large consolidated prime integrators with multiple-tier suppliers. Those primes are often compelled to invest outside of defense to maximize shareholder value.

True? Recent examples seem to support at least some of his points. Harris Corp. (NYSE: HRS) is buying Exelis Inc.(NYSE: XLS) — merging two defense prime contractors. And Raytheon Co. (NYSE: RTN) this week announced its plan for a nearly $2 billion investment in commercial cybersecurity.

The driver of challenges is of course budget related. As Stackley noted, “without more stability and predictability in defense budgets, there is less defense market investment and innovation, and less product affordability without more companies in the market to improve competitive pricing.”

It’s a supply-and-demand problem. And attracting new entrants into the defense industrial base to offset the loss of innovation and competition isn’t easy. “Overhead cost of entering and operating in a unique, uneven and overly bureaucratic market discourages prospective entrants — both large and small commercial companies,” he said.

Stackley didn’t exactly offer a solution — saying only that weight has to be given to these factors when considering any new legislation or policy affecting defense acquisition. In other words, don’t pass regulations that could handicap the industrial base even more.

“Oversight and governance of the enterprise is necessary and is expected, but it is crucial to strike the right balance in order to achieve affordable outcomes,” he said. “The penalty for too much oversight is ever-increasing costs and impediments to execution that have no ceiling. … In sort, the sheer size and overlapping nature of the bureaucracy runs counter to objectives of efficiency, productivity, and performance.”