[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-79]
THE DEFENSE INDUSTRIAL BASE: A NATIONAL SECURITY IMPERATIVE
__________
HEARING
BEFORE THE
PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
HEARING HELD
OCTOBER 24, 2011
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PANEL ON BUSINESS CHALLENGES WITHIN THE DEFENSE INDUSTRY
BILL SHUSTER, Pennsylvania, Chairman
BOBBY SCHILLING, Illinois RICK LARSEN, Washington
JON RUNYAN, New Jersey BETTY SUTTON, Ohio
ALLEN B. WEST, Florida COLLEEN HANABUSA, Hawaii
Lynn Williams, Professional Staff Member
Timothy McClees, Professional Staff Member
Catherine Sendak, Research Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2011
Page
Hearing:
Monday, October 24, 2011, The Defense Industrial Base: A National
Security Imperative............................................ 1
Appendix:
Monday, October 24, 2011......................................... 29
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MONDAY, OCTOBER 24, 2011
THE DEFENSE INDUSTRIAL BASE: A NATIONAL SECURITY IMPERATIVE
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Larsen, Hon. Rick, a Representative from Washington, Ranking
Member, Panel on Business Challenges within the Defense
Industry....................................................... 2
Shuster, Hon. Bill, a Representative from Pennsylvania, Chairman,
Panel on Business Challenges within the Defense Industry....... 1
WITNESSES
Chao, Pierre, Senior Associate, Center for Strategic and
International Studies.......................................... 6
Downey, Fred, Vice President, National Security, Aerospace
Industries Association......................................... 4
Watts, Barry, Senior Fellow, Center for Strategic and Budgetary
Assessments.................................................... 3
APPENDIX
Prepared Statements:
Chao, Pierre................................................. 61
Downey, Fred................................................. 47
Larsen, Hon. Rick............................................ 35
Shuster, Hon. Bill........................................... 33
Watts, Barry................................................. 37
Documents Submitted for the Record:
AIA White Paper, Building and Maintaining Value in the
National Security Space Industrial Base.................... 103
Summary from Industry Roundtable, Rock Island, IL............ 97
Witness Responses to Questions Asked During the Hearing:
Ms. Hanabusa................................................. 111
Questions Submitted by Members Post Hearing:
Ms. Hanabusa................................................. 115
THE DEFENSE INDUSTRIAL BASE: A NATIONAL SECURITY IMPERATIVE
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House of Representatives,
Committee on Armed Services,
Panel on Business Challenges within
the Defense Industry,
Washington, DC, Monday, October 24, 2011.
The panel met, pursuant to call, at 3:02 p.m., in room
2212, Rayburn House Office Building, Hon. Bill Shuster
(chairman of the panel) presiding.
OPENING STATEMENT OF HON. BILL SHUSTER, A REPRESENTATIVE FROM
PENNSYLVANIA, CHAIRMAN, PANEL ON BUSINESS CHALLENGES WITHIN THE
DEFENSE INDUSTRY
Mr. Shuster. The hearing will come to order. I want to
thank everybody for joining us here today. It is especially
good to see my colleagues back from our recess. I hope it was
productive for everybody. I believe that today's hearing will
serve as a foundational discussion for this panel as it moves
forward in its working to examine the challenges of doing
business with the Department of Defense [DOD]. The House Armed
Services Committee [HASC] has led the way in improving how DOD
develops and buys equipment and needs. As most of you know, the
HASC has successfully shepherded a substantial reform effort,
the Weapons System Acquisition Act, through the legislative
process to the President's desk. While the bill did much to
garner efficiency, increase transparency and foster
competition, there is still room for improving DOD's business
practices.
I am a strong believer in the fact that you can't solve the
problem without looking at both sides of the equation. And that
is exactly why Chairman McKeon and Ranking Member Smith
established this panel, to look at the business side of the DOD
acquisition system. I wanted to start this series of hearings
with a broad look at the defense industrial base [DIB] to give
the panel a clear framework for moving forward. Today we have
well-recognized leaders in public policy regarding the defense
industrial base joining us.
On November the 1st, we will follow up with senior
officials from DOD's Manufacturing and Industrial Base Policy
office and Small Business office to give us their views on the
issue. After that, we will move on to several hearings focused
on some of the specific issues and challenges facing the
businesses that are eager to provide technologies and services
to support our warfighters.
We have some terrific witnesses with us today, and I am
very grateful that they have taken the time to share their
insights and expertise on the defense industrial base with my
colleagues. I would like to introduce them. First, Mr. Barry
Watts, Senior Fellow at the Center for Strategic and Budgetary
Assessment [CSBA]; Mr. Fred Downey, Vice President, National
Security, Aerospace Industries Association [AIA]; and Pierre
Chao, Senior Associate, International Security Programs, Center
for Strategic and International Studies [CSIS].
Again, gentlemen, thanks for taking the time to be here
with us today. I also want to take a minute to thank Mr.
Schilling and Mr. Loebsack and their hard-working staffs for
hosting the panel in the Quad Cities area of Illinois and Iowa.
We had a very informative discussion there with industry
leaders and learned a great deal about what goes on at the Rock
Island Arsenal. It was an extremely useful trip and I
appreciate all the effort that went into it. I also want to
thank Black Hawk College for letting us use their facilities to
hold the meeting.
The committee staff prepared a summary of discussion with
the industry at Rock Island and it was provided to all of the
panel members. Without objection, I would like that to be
entered into the record. Hearing no objection, so ordered.
[The information referred to can be found in the Appendix
on page 97.]
Mr. Shuster. On Friday, members of the panel will travel to
Akron, Ohio, to hear from the industrial base in that area and
to meet with engineers and scientists at the University of
Akron who are engaged in efforts to help DOD prevent and
mitigate corrosion. In these tough economic times, we have got
to make sure we are doing everything we can to get the most out
of every piece of equipment we ask the American taxpayer to
provide, and mitigating and preventing corrosion is a critical
part of doing so. I am very much looking forward to that trip
and the discussions on developing and in transition critical
technologies to help DOD sustain its equipment.
I want to thank Ms. Sutton for inviting us to her district.
With that, I turn to my friend from Washington, Mr. Larsen, for
any remarks he might want to make.
[The prepared statement of Mr. Shuster can be found in the
Appendix on page 33.]
STATEMENT OF HON. RICK LARSEN, A REPRESENTATIVE FROM
WASHINGTON, RANKING MEMBER, PANEL ON BUSINESS CHALLENGES WITHIN
THE DEFENSE INDUSTRY
Mr. Larsen. Thank you, Mr. Chairman. I appreciate the
opportunity to make a brief opening statement, but also, again,
to thank you for your leadership on this panel. The panel is
tasked with looking at ways the Department can improve its
contracting practices for the benefit of our warfighters,
taxpayers and businesses. DOD must continue its efforts of
building a strategic dynamic contracting process, one that
ensures those who have great products do not fall by the
wayside. A key component of this process is ensuring that we
protect and grow our Nation's defense industrial base. The U.S.
defense base has a long history of producing the best military
systems in the world. We must ensure that this continues both
for our warfighter and because it creates jobs here in the U.S.
In August, the chairman and I heard from several businesses
in my own district about successes and challenges that they
have had with the DOD and with contracting. All of these, in
fact, were small businesses. These anecdotal accounts help give
us an understanding of the real-world experiences small
businesses face and the challenges they face while trying to do
contracting with a very large government bureaucracy.
Today we have witnesses that have studied Department of
Defense policy and laid out policy implications and reforms
that we should seriously consider as we move forward in looking
at how we can help small- and medium-sized businesses access
the Department of Defense contracting process. I look forward
to hearing today's testimony. Thank you again, Mr. Chairman.
[The prepared statement of Mr. Larsen can be found in the
Appendix on page 35.]
Mr. Shuster. Thank you. And with that, we will proceed with
our witnesses. First, Mr. Watts. You may proceed. But I see in
your bio here, you are a graduate of the University of
Pittsburgh. So are you a native of western Pennsylvania, or
just attended graduate school there?
Mr. Watts. No. I attended graduate school there.
Mr. Shuster. All right. That is great. You don't have that
Pittsburghese accent. Or at least I didn't pick up on it yet.
Well, thank you very much for being here today.
STATEMENT OF BARRY WATTS, SENIOR FELLOW, CENTER FOR STRATEGIC
AND BUDGETARY ASSESSMENTS
Mr. Watts. Well, Chairman Shuster, Mr. Larsen, members of
the panel, thank you very much for giving me the opportunity to
testify. I just want to make a couple of quick comments about
caveats for the Center for Strategic and Budgetary Assessment's
report that we put out earlier in the year. We focused pretty
much on prime contractors and major defense acquisition
programs in that particular report. As a very small think tank,
we have very little capacity to do the sort of thing that Brett
Lambert is trying to do over in the Pentagon and that is, go
down to the lower tiers and the parts suppliers, and even the
material suppliers. That is an enormous job and a small group
like ours, it is just beyond what we can do.
We also didn't say much about some of the ITAR
[International Traffic in Arms Regulations] constraints, the
legislative constraints that make it difficult for the defense
industrial base to access the global defense economy, as
Jacques Gansler talked about at great length in his recent
book, ``Democracy's Arsenal.'' Beyond that, I will just make a
couple of comments about the three pieces that were in my
written statement.
First of all--and I am not going to say much about this--I
think, here in Congress, it is clear that this is not a normal
free market economy when we talk about the defense industrial
base. It is very different than consumer electronics or the
automobile industry. It is highly regulated. The regulators and
the customer are one in the same, the U.S. Government, and
there are piles and piles of regulations and statutes that try
to make the business processes as low risk as possible when you
do--particularly when you do major programs. And I would
certainly suggest that whatever can be done to try to relieve
some of that burden would be useful going forward.
Given the present fiscal situation that the Pentagon is
facing, they have had almost a decade of growing budgets, they
had supplementals, and now the base defense budget is surely
going to start going down and will probably go down for a
period of time into the future. Given that, I think it is
essential for the Pentagon and the U.S. Government writ large
to develop a coherent long-term strategy for deciding what
pieces of the defense industrial base are really going to be
important going forward over the next several decades and make
some real strategic choices.
We talked in the report about six or seven or eight major
areas which we think should be invested in preferentially. We
did not give you or suggest a list of what those are. But we
think if you are going to have a strategy insofar as strategy
is about choice, that you are going to have to focus on
capability areas that are probably in the single digits. If you
end up with 75 or 123 most important things, you just don't
have a strategy. And it is very difficult, given the interests
of the various, here on the Hill and Congress, and the various
services and constituencies and industry, to not end up with a
very large list.
So I think making that choice going forward is really
critical. Let me just say that it is not easy. You need to
start with the challenges that we will face from a national
security standpoint over the next several decades, and that is
going to be difficult enough figuring out what the really seven
or eight, or maybe nine really important areas are. Then
secondly, if we could get some consensus on what those are,
there is the problem of deciding what pieces of the industrial
base, the defense industrial base, would really support those
capabilities going forward.
I mentioned in my statement anti-access/area-denial
capabilities. And if you thought that was important, that was
an area where we really have invested preferentially, there is
a whole range of different options that you could choose. You
could buy more Aegis cruisers or emphasize missile defense. You
might want to invest long term in directed energy. You might
think more about submersible combatants. There are a whole
range of things. Both of those choices, deciding what the
really important threats to pay attention to over the next
several decades and deciding what pieces of the industrial base
are really critical to supporting them. Those are difficult
choices. And with that, I will end. My 5 minutes are up.
Mr. Shuster. Thank you very much, Mr. Watts.
[The prepared statement of Mr. Watts can be found in the
Appendix on page 37.]
Mr. Shuster. With that, Mr. Downey.
STATEMENT OF FRED DOWNEY, VICE PRESIDENT, NATIONAL SECURITY,
AEROSPACE INDUSTRIES ASSOCIATION
Mr. Downey. Mr. Chairman, Mr. Larsen, distinguished members
of the panel, it is a real pleasure for me to be here as a
representative of more than 350 companies who are part of the
aerospace and defense industrial base. The week of September
12th was National Aerospace Week by congressional resolution.
During that week, we celebrated our legacy of global leadership
and aviation defense in space. In the coming months, several
momentous decisions will be made about the Nation's budget,
which will ultimately affect what kind of aerospace and defense
industrial base we will have, what capabilities it will
possess, and whether or not we will remain the global leaders.
Those decisions will be taken in the absence of an industrial
base strategy, and if history repeats itself, without full
participation from those who must manage the industrial base
during what is a time of historic reorganization.
I think most Americans would agree that the 20th century
was defined by aerospace, and that it was largely our century
because we were second to none in aerospace. I think the 21st
century will also be defined by aerospace. The question is
whether we are still going to be second to none.
While most accept that the industrial base is a national
strategic asset, too many choose to treat it with benign
neglect, assuming that the free market will always work to make
sure we stay second to none. As Mr. Watts said, although it
never really was a free market, it was so successful that many
believe it is now a national birthright.
But that was then. The industrial base that existed then
doesn't exist today. It is a far cry from the military
industrial complex of the Eisenhower era. In the 20 years since
the cold war, nearly 150 significant defense companies have
consolidated to 6. The number of big companies left the market,
almost none have entered it. In the post-cold war,
consolidation has created a situation where the top firms have
grown individually, but the market has shrunk significantly.
So, far from being the powerhouse that many suggest, the
combined annual revenue of the top seven members of the
aerospace and defense industrial base today is about one half
of the annual revenue of Wal-Mart. That is how it has changed
since the days of the cold war. If these trends continue and
the defense budget continues to be cut, the capability to
deliver critical militarily unique systems will atrophy and the
capability our troops and the American people expect might not
be available. We have to have the capability to design,
develop, produce and support complex systems. And that requires
having programs to work on. If we don't, the companies that
make up our industrial base can't continue to invest in the
workforce, plant and research that might be needed. The impact
will be felt first on our workforce. We have only half the
workers we did 30 years ago and the recession and budget
reductions already have further reduced that amount. Recent
analysis performed by Dr. Fuller at George Mason University and
others find that the total American job loss for just the first
part of the Budget Control Act [BCA] will be approximately
430,000 jobs, and about one-third of those jobs will be from
the defense, aerospace and industrial base. But it is not just
jobs we are going to lose. It is the valuable human capital.
The most brilliant and ambitious technicians, engineers and
scientists have sought to work for the industry, but we are
facing an increased competition from other high-tech sectors
for those workers. Without the challenges, we are not going to
get there.
We need two things: We need budgets that produce programs
that are profitable and that reach out to the talent we need,
and we need an industrial base strategy that gives direction
and predictability that the industry leaders need to make sound
strategic business decisions. Without those two things, it is
doubtful whether we will have the aerospace and defense
industrial base that has provided the capability that our
soldiers, sailors and airmen and the American people have come
to expect. Thank you, sir.
Mr. Shuster. Thank you.
[The prepared statement of Mr. Downey can be found in the
Appendix on page 47.]
Mr. Shuster. Mr. Chao.
STATEMENT OF PIERRE CHAO, SENIOR ASSOCIATE, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES
Mr. Chao. Mr. Shuster, Mr. Larsen and members of the panel,
thank you for inviting me. As was noted, I am a senior
associate at CSIS. I am also a managing partner at Renaissance
Strategic Advisors. So I am not only a student of the industry,
but also a practitioner in it. You are asking a great question
in terms--and an important one, particularly given the budget
environment that we are entering into. However, it is a
question that you need to, I think, approach with caution,
because one of the worst things that one can apply when it
comes to defense industrial policy is a one-size-fits-all
mentality. In fact, more damage has been done to the industry
by trying to apply these one-size-fits-all policies. We would
suggest that thinking about the industry as a whole in sort of
three constituent parts: The emerging technologies and
companies, think cyber, think directed energy, think mobile
applications, the new technologies of today as one sort of
group that has its own issues and topics.
You then have the core part of the market, or the mature
part, the constituents of Mr. Downey, the Lockheeds, the
Northrops and the Boeings of the world and their supplier base
to Mr. Larsen's point, that there is a whole small business
community. And then there is the much more mature legacy
component. Those are the remaining sort of monopoly or duopoly
manufacturers of--for example, the shipbuilders, space launch,
went down to one major supplier, fixed-wing aircraft, went down
to two, and tank manufacturing, went down to one.
The policy issues and the contracting issues are different.
On the emerging sort of category, this is where technology is
important, access to technological talent. The issue that we
have in our schools with science and technology is a critical
issue. They can't find enough scientists. Export controls are
absolutely critical to this category where we are not getting
inside the technology because people are afraid to put
technology in the U.S. because they can't get it back out
again. It has become a serious issue. The lack of venture
capital. And even the overall environments for these small
emerging companies operating in a budgetary environment,
frankly, under continuing resolutions [CRs], it is very hard
for these young companies to sort of enter and come in and do
things.
The other thing that is very important to think about when
you are thinking about policies relative to these, don't shut
down competition too early. In this part of the segment, you
like having 8, 9, 10 different players, because we are still
trying to figure out what is the right technology. Think about
what the aircraft industry looked like in the 1920s, where it
had eight or nine different companies. They were making
airplanes with three wings, two wings, engines in the front and
the back. We didn't know which one was the right way. You can
think of the UAV [unmanned aerial vehicle] industry today as
the same one. The Orville and Wilbur Wrights of the 21st
century are playing in the new space launch markets and the
UAVs; shutting off competition too early is actually dangerous;
preservation of the science and technology budgets is critical
for this constituency.
So the 6163 budget funding to places like DARPA [Defense
Advanced Research Projects Agency] are sort of the lubricant or
the thing that keeps this part of the industrial base vital and
alive. In the mature part or the core part of the supplier
base, these again are the Lockheed Martins, the Northrop
Grummans, the General Dynamics and the Boeings of the world.
They represent, frankly, the jobs that we have in our districts
today, and in many cases, they are in some of the most sort of
underrepresented areas. And their supplier base underneath them
sort of represent the mainstay.
Here this is where the core questions about DOD acquisition
processes, how difficult is it, how much overhead burdens are
we putting on them with unneeded processes and others. This is
where the call for strategy and focus that Mr. Watts and Mr.
Downey called for is going to be absolutely critical. They can
figure their way out as long as they know where we are going.
Right? And in the absence of a strategy, it becomes too easy
for some of them to sit there and say--just like they did in
the 1990s--this is too difficult, I am going to go home, I am
going to go somewhere else. A great example.
And we also have to remember that defense is a small market
for some of these. We went through untold pain related to the
tanker program, for example, over about 160 airplanes in the
end that represents about 10 weeks worth of production for
Boeing and Airbus.
So keeping that in mind in terms of we deal with that. The
legacy one is probably one of the most complex for you because
it represents core capabilities, tanks, submarines, aircraft,
space launch, critical capabilities where we have an advantage,
but we are down to a very small set of suppliers. And frankly,
it sometimes takes a lot of money in order to keep that core
capability set. And here we just need to decide which ones are
core capability sets that we want to continue, and where we
need to put in sufficient engineering and money to sustain
engineering talent versus who is the last buggy whip
manufacturer and actually should go away, because they are in
more the legacy side of it.
So from that perspective, the issue of making sure that
there is enough money to sustain that old legacy set of
capabilities until the new emerging guys rise becomes one of
the most critical questions. This is really important for the
small suppliers because I think where you will find the most
amount of vulnerability is in the last propeller manufacturer
for the U.S. Navy, for example. Or there is an example of--it
turns out the last maker of linen bags for artillery shells
also does habits for nuns. And the nuns decide to pull their
contract, and now suddenly the U.S. Navy is worried about who
is going to make the last set of linen bags for the artillery
shells.
You are going to find all sorts of strange, bizarre pockets
of industry that are actually absolutely critical and
important. And so from that perspective, the policies that work
at one end of the industry don't work at the other. So as you
go through your work, which I commend highly, the right sets of
questions, think through those buckets and the impact that it
has across those different parts of the industry. Thank you.
Mr. Shuster. Thank you very much.
[The prepared statement of Mr. Chao can be found in the
Appendix on page 61.]
Mr. Shuster. Mr. Chao, could you talk a little a bit more
about the technology, the emerging companies and the
technology, we are keeping it out of DOD. We heard in one of
our hearings where--because of the ITAR regulations, that it is
very difficult once you have a technology that it is in the
open market with our folks providing to DOD can't sell
commercially now, so it really constrains them. So what you are
suggesting is that people are saying I am not even going to
start selling to the United States Government because they are
going to capture this and I am going to be hamstrung.
Mr. Chao. This is one of the thorniest topics on the
landscape in terms of export control reform. I know this
committee and Congress and the Administration have been looking
at this topic. We have the beginnings of a lot of strange,
unintended consequences because of the way the policy has been
put into place. It has logically been put into place in order
to prevent core American technology from leaking out to
adversaries.
It is having the unintended consequences the way it is
being implemented where companies are afraid to put the
technology into the U.S. and are keeping it outside. You are
seeing this mostly in very cutting edge telecommunication
technologies. I am aware of at least two instances where global
companies have decided to sell off their U.S.-related
businesses in order to be able to compete globally because it
was, again, too difficult.
You are beginning to hear other countries about developing
products that are ``ITAR free.'' And when you talk to those
companies--and CSIS did a big study on this--these are
countries and companies that say we would have gladly bought
American had we been allowed to. Since we weren't, we had to
build our own set of technologies.
So we have to figure out a way to reconcile that core need
of making sure that our core technology doesn't go out while
mitigating some of these unintended consequences. And I would
argue those unintended consequences are rising at such a level
that it is getting to crisis levels where addressing this
issue, I think, is going to be absolutely critical.
Mr. Shuster. And you talked about shutting off competition.
Where is that occurring and how is that occurring?
Mr. Chao. It is not occurring yet. But as we go into a
tighter budget environment, it is going to become very easy to
sit there and take a look at that list and say boy, I am
running 10 UAV competitions or programs, maybe I should just go
to one. And all I am saying is 10 to 8 is probably okay. Ten to
one would be disastrous because we are still trying to figure
out that technology, for example. And others where the answer
is becoming more evident just like it occurred with the
aircraft industry where we settled on a common solution, a
single-wing monocoque hull, and others, it is okay to narrow
down.
Mr. Shuster. Thank you. The Department of Defense just came
out with a report talking about long-term investments, short-
term strategically looking at what I think--Mr. Watts, you
talked about that. But that the report is almost schizophrenic.
It talks about those things being important, yet it is going to
allow the market to continue to drive our needs, or to provide
for our needs and you are saying in your report that we need
some kind of strategic plan moving forward to keep, like Mr.
Chao said, some of our legacy, some of our other core
competencies, did you see the report at all?
Mr. Watts. Yes, I have looked at it.
Mr. Shuster. Your assessment is?
Mr. Watts. Well, it seems to continue to assume that this
industry operates like consumer electronics or the automobile
industry, and if that is not the case, then trying to develop a
strategy based on an incorrect assumption, an incorrect
understanding of the nature of what they are trying to manage
and develop a strategy for is probably not going to succeed.
Dr. Gansler, going all the way back to 1980, pointed out
that because of the acceptance of that assumption, that
incorrect assumption that it is a normal free market and
competition will really work the same as it does in consumer
electronics or flat-screen TVs, the policies, based on that
assumption, have generally done more harm than good. So now in
fairness to that report, they did talk about the service
aspects of defense acquisition as opposed to major weapons
systems. And the use of competition may be more useful in the
services in the defense procurement.
So there is a point to be made there in terms of the way
they structured the report. But still, the assumption about the
nature of the industry just, as far as I can tell, has been
wrong since the 1950s.
Mr. Shuster. Mr. Downey, you concur with that, for the most
part, from the sounds of your testimony?
Mr. Downey. Yeah. I do entirely. I think competition
certainly ought to be used for those sectors of the industry
where it may be effective. Electronics is a key area. But there
is not going to be much competition for a nuclear submarine or
a long-range bomber. There just aren't enough companies in the
market. So you can't have classic competition in some core
capabilities. And I think the challenge for the Pentagon is to
understand the difference and construct a strategy that is
adequate to deal with the differences, as Pierre [Mr. Chao] has
said.
Mr. Shuster. And I fully intend--at some point, we will
have the folks from the DOD in front of us to ask why they
believe that this can be a market driven to provide us with all
when it is clear when most people look at it--when you look at
it as with common sense, that DOD is the regulator, the
procurer, there is just one U.S. Department of Defense. Why do
you think, in their minds, are they just kicking the can down
the road, because we have got fiscal financial restraints?
Mr. Watts. I am just puzzled by why that has persisted as
long as it has, is all I can say. It seems to be a myth at
best. Perhaps it is just--you know, we look at the really
normal market commercial parts of our industry. We think
competition and innovation are very important, and we just sort
of assume that it is pretty much the same in the defense
industry on the one hand. On the other hand, if you look at
down select from an RFP [request for proposal] to move into
development of a program, most of the competition ends at that
point, notwithstanding, essentially, the direction in law from
that 2009 Reform Act which suggested that the Secretary of
Defense should try to maintain competition throughout the life
of programs. It just hasn't been happening. And the best
example is the second engine for the Joint Strike Fighter.
If you go back and review the reasons that Secretary Gates
gave for not going ahead with that, it was basically the
tradeoff between the real upfront of $2.7 billion or so of real
cost to develop the engine, and the more theoretical benefits
of the long term--you know, actually being able to compete two
engines over the lifespan of that airplane, which they judged
as more theoretical and ephemeral and didn't think it was worth
the $2.7 billion.
Mr. Downey. Mr. Chairman, if I might add, I think part of
the answer to your question is simply not watching what is
happening to the market in general. In the 1950s and 1960s,
when we were designing 10 aircraft and producing 6, competition
made sense. When you have a market of only one or two actual
producers today and no real prospect in a very capital
intensive sector of attracting new competitors into the market,
then you have to look at something different. And that is a
hard thing to do. It is much easier simply to assume that
competition will give you the innovation and go forward.
Mr. Chao. I would also submit to you, again, it is the
difference between these different segments. So when the
Pentagon writes that report, they are looking at some of the
emerging technologies. If you were to put an RFP out today and
say I need a cyber solution, or I want to put a PDA [personal
digital assistant] in every soldier's hand, I guarantee you are
going to get a lot of competition, a lot of people will show
up. That is not who they are representing, that is not who they
are talking to. To sit there and say I want competition in tank
manufacturing is silly. We haven't designed a new one. I have
got a very good supplier. I am down to one. And I would be
wasting money. That is more of a negotiated relationship as
opposed to where you can have an open arm's length
relationship--and again, services, newer technologies, that
works fine. And that is where, I think, you have also the
schizophrenia of the report, because they are talking about
that part of the industry, I would suspect that--most of the
people you are talking about the pain that is going on inside
the defense industry is from the more legacy part of the
industry that is down to that narrow base.
Mr. Shuster. Thank you. Mr. Larsen.
Mr. Larsen. Thank you, Mr. Chairman. Just an observation in
the first 8 to 10 years of this decade when there seemed to be
relative plenty to the defense budget, we were getting the same
complaints. So fiscal restraint is here and coming and we have
the same complaints. Sort of gets to Mr. Watts' point. I wasn't
here in the 1950s, but I will take your word for it, that the
complaints were the same. As always, there is always never
enough money and there is always plenty of bad ideas being
brought to the Government for funding, as well as good ideas.
And our goal here is to be sure the good ideas, no matter where
they come from, get a hearing to increase the opportunities for
warfighters to get the products and services and support that
they need.
One example--and I think this is interesting--I guess, I
would ask Mr. Chao, Mr. Downey. This question has to do with
satellites. There is a new entrant in the market who is seeking
to become a competitor in the defense side of the business.
So--but the core part, as you would describe it, the core part
of the industry, either--well, I won't say that they don't want
that competitor, but the rules are set up to encourage to
support the core part of the industry, and to seemingly
discourage the new entrant. This has to do with the SpaceX
versus the Boeing on the satellite side.
So how do we bridge that? How do we bridge that problem as
an example? I didn't come here to talk about this in
particular. But it is a perfect example of where you have a new
emerging entrant who actually wants to now jump the gap to
become a competitor in a larger program.
Mr. Chao. That is a great example. You can take those, and
again, you can pit the classic aircraft manufacturers against
the UAV manufacturers, the light vehicle--I mean, each one of
these sectors has players in each place. Part of it is driven
by the policy and the technological solutions that the Pentagon
wants to go after. If the core way that we are going to do our
satellites is large, sort of monolith, multibillion dollar
satellites that have capabilities, it is going to be very hard
to give that to a small startup, and it would drift itself
towards there.
A policy suggestion or things that some people have
suggested is that while you are keeping that core legacy,
ensuring that there is a certain amount of money preserved for
the technological innovation amongst the younger ones is money
worth spending as the hedge, and in order to usher along some
of these newer technologies. In markets where there is a large
commercial market, the commercial market will do that for the
Pentagon.
In places where it is a little harder and there isn't a big
market, space, you happened to pick one, would sit there and
say that it is probably too early to hand it over to that young
startup, so I want to keep my core. But on the other hand, you
are probably going to want to usher along some of these new
guys to see what the new technology is.
Mr. Larsen. Mr. Downey.
Mr. Downey. I think it is a great question, and we are
going to have to figure out how to integrate new innovative
ways of building capabilities that we have built before. But in
general, a great idea isn't a capability. A capability is the
ability to design, develop, produce, and support a system
throughout its life cycle and to build the skilled workforce
that can do those things.
Our policies today are to buy fewer and fewer pieces of
equipment, have fewer programs with far more time between new
program starts. It is very, very difficult to sustain that
life-cycle capability in that kind of environment. Most small
companies don't have the staying power or the resources to be
able to do that. So having a one-time capability to compete for
one thing doesn't necessarily mean you sustain the capability
in terms of a unique military capability.
Mr. Larsen. But that is one of the challenges facing the
smaller companies in general, that longer lead time. So again,
it is a process that plays against them as opposed to
encouraging newer entrants into even the smaller niche areas of
the defense budget, and something that we heard from folks and
certainly in my district and from other places as well. So I
think accepting that as a reality is part of what we don't want
to do here. We want to accept that as a challenge for the
Pentagon to change as a way to encourage smaller and medium-
sized businesses. Maybe we can help define what is an
appropriate market and what is not an appropriate market too,
and help them along. We will hear from folks next week on this
point.
The point you made about the aerospace defense industrial
base today is not the one of the past but that we need budgets
that produce programs that are profitable and stable--I don't
want to put words in your mouth. I think from your members'
point of view and from the current market's point of view,
clearly, stable contracts that help provide a profit to the
business is a good idea from your side of things, and probably
the number one priority, despite the brochures; our number one
priority is the warfighter and making sure they get the
services and products and things so they can do the things we
are asking them to do. Where those match, it is a great idea.
Where they don't match, I would rather see us prevail. I would
rather see the Pentagon prevail so that we are getting the
services first. But if we do that, then that may not help you
all prevail. So trying to find the sweet spot where you are
coming--folks are coming and saying we need programs that are
profitable, frankly, we have to say, well, we want programs
that work, and they work on time and you are responsible for
that, too.
Mr. Downey. Well, I don't think there is any difference in
what we are saying at all. If you have a strategy, you know
where you are going, you have predictability and stability, and
you have a reasonable way to do strategic business planning
that satisfies your shareholders.
And we have to remember that the members of the aerospace
and defense industrial base are largely private companies. They
are not government companies. If they don't meet the
expectations of return on investment--and here is an expert on
that--then their boards are going to force them into more
profitable areas.
So the more predictability and stability you have, the
better opportunity to calculate that critical return on
investment, and the stability allows you to build those things
that work, that are on time, and that are on the contracted
price. The more instability you have, we would say, the less
likelihood that you are going to get an era where you don't see
cost increases and schedule slippages. We have got to get to
the point where we have that understanding of what is wanted,
when it is wanted and it isn't changed on an annual basis, or
when a chief of service or a new administration turns a
critical must-have into a nice-to-have but expendable.
Mr. Larsen. The other challenge, if I may, Mr. Chairman, a
challenge we all obviously face and we have heard from other
folks is the--another solution is the board decides to go out
and purchase that smaller company, right? They go out and
purchase the capability and bring it in-house themselves, which
is a challenge we have heard from other folks, is how do we
maintain--how do we help maintain the incentive structure so
that the independence and smallness and innovation side of
these small- and medium-sized businesses stays independent and
innovative as opposed to getting sucked in to become a division
or subsidiary of a company?
Mr. Chao. That has partly been driven by the lack of
visibility in the market space. Right? The large companies have
cut independent research and development down from about 5
percent of their revenues to about 1\1/2\ percent, and they
have been substituting M&A [mergers and acquisitions] for that
research and development because in the absence of knowing
where the building wants to go, the only thing they can do is
watch that little guy succeed, and at least they know that,
hey, they are buying from that guy, so I will pull him in.
The other thing about the profitability--just one quick
point there. This is the only market space where the customer
would gladly pay a billion dollars at 8 percent margin rather
than $500 million at 20 percent margins. It is completely
turned around. And that mentality sort of creates a lot of I
think these perverse sort of disincentives for innovation, new
entrants, et cetera. So as you hear proposals for, you know,
reforming the system, just be very careful in watching about
the assaults on the profit, which I can understand from a
political standpoint, is actually going to end up generating
the exact opposite. The industry would gladly trade lower
dollars for higher profits each time. But for some reason, that
is not in the mix.
Mr. Larsen. Thank you, Mr. Chairman.
Mr. Shuster. Mr. Runyan.
Mr. Runyan. Thank you, Mr. Chairman. And, gentlemen, thank
you for coming and your testimony. I just really have one
question. We talk about the industrial base in this country,
how it is--frankly how I look at it is the last major form of
industry that we have here that is solely done here, and how we
keep that, and Mr. Downey you have said obviously we need to
have some confidence in projection forward in how we can
procure stuff like this. My one thing, and I don't think--I
don't think it gets enough traction, and I think it is really
directly linked is the turn we have actually taken in space
exploration associating with defense. Can you kind of talk--
because I know there is a lot of one offices and small
suppliers that are involved in that industry. Can you kind of
touch on that a little bit?
Mr. Downey. We are concerned about the space industrial
base, especially as it relates to the national defense space
industrial base. There is some good news. There is an emergence
of commercial space companies. Some of them are, in fact,
members, and we look for great things from them. But I would
make the same case. Space is an expensive proposition. The
return on investment right now is somewhat problematic, and we
need the Government strategy that keeps us moving forward on
the cutting edge of technology.
There have been many who have said they would bet you a lot
that the next boots on the moon are going to be Chinese. And I
am not sure that they are wrong. And only the Government, only
NASA [National Aeronautics and Space Administration] and the
Pentagon can have the kind of vision that translates into
programs that builds the capabilities, and then as the
commercial companies build their capabilities, I think they
will be serious members of the United States space industrial
base.
But we risk losing some critical parts. We don't have a
heavy-lift capability. Our satellite capability is atrophying,
and everybody knows what the situation is with our manned space
program. Right now, you know, we are dependent on the Russians
to get to the space station. And the capability will atrophy.
It will. And the small companies that make up the supplier base
won't have the majors to sell to. They will turn to something
else and then we will have to start again.
Mr. Runyan. And I think even looking forward and planning--
and we hear it--testimony all the time, that even when the DOD
tries to project what is going to happen in a QDR [Quadrennial
Defense Review], that changes tomorrow. So--in a way it is kind
of an oxymoron to go back and forth. We are planning for the
future, but the future changed yesterday after we already put
the report out. So I understand the frustrating aspect of it.
But to help us nail down a way to keep the industrial base here
I know is a frustrating proposition. So thank you. And I yield
back, Chairman.
Mr. Shuster. Thank you, Mr. Runyan. Ms. Hanabusa, you are
next.
Ms. Hanabusa. Thank you, Mr. Chairman. And I would like to
thank the chair and the ranking member for taking us to Rock
Island. It was a very interesting adventure for someone from
Hawaii to actually see a working foundry. I think I would like
to start first with Mr. Downey. Mr. Downey, I was reviewing
your publication, ``Defense Investment, Finding the Right
Balance.'' And you say things like how much is enough, which is
an interesting concept of how much is enough. But I think the
problem that I see that we are having is the fact that when we
talk about the defense industrial base, right, some of us think
about things like R&D [research and development], because we
know that the Big 7 or the Big 5, as you say, in 1993, 30
companies went down to 5 in essence. And then we forget that
the other component of it is truly an industrial base, in other
words like the foundry, who then manufactures. But then we have
this conflict of how do we decide what is going to be
manufactured because of what we are developing and, it comes
down to really a sense of what is, from our perspective, the
defense going to look like, or the military is going to look
like into the future? And I know each of you have your
different areas.
So can you tell me each one of you, beginning with Mr.
Downey, you can go to Mr. Chao and Mr. Watts afterwards--what
is that fundamental end goal that we are looking at, you might
call it end strength, I am talking about people. What is that
end goal we are looking? Let us take it 10 years out, to 2021.
What are we planning for? Because until we have a clear view of
that, how can we then decide enough is enough or when is enough
enough? Is 4.4 percent of GDP [gross domestic product] enough?
And how do we spend that money? And how do we keep the
industrial base, which is manufacturing and the research and
development when we go from 30 to 5?
Mr. Downey. Ms. Hanabusa, I think there are--I detect this
as two parts. One is that we do need a strategy to decide what
we want our military to do in the future, what forces we need
to do it, and what technologies and weapons we want to provide
them to do it. That is frankly supposed to be the job of the
QDR. It has not done a terrific job there. So that is about
getting down to what specifically we are going to do and what
we need. The report you talked about was one where we looked at
the issue from a macro level, and said the United States since
mid-20th century has been a global power with global
responsibilities and global reach that we have ended with up a
military of a relative size of 1.5 million active. And when we
looked at the budgets over time, and the ups and downs of the
budgets, what we found was that in order to have that global
military with global reach and global responsibilities, every
time we came down much below 4 percent of GDP, and at the same
time, reduced the investment accounts to below--much below 35
percent of that top line, we ended with up a hollow force,
whatever the specific goals, whatever the specific forces were.
And so I think it is back to a point I made earlier. You
have to make these choices, but you have to have adequate
resources. And so we started with the assumption that the
United States is going to remain a global power with a global
force, with global responsibilities, and we looked at the--an
interesting point too, that increasingly, that 1.5 million
looks smaller and smaller to do all of those things.
So we have had a historical policy of using the technology
advantage we have had. And so the amount of money that it takes
to field one of those 1.5 million is going to keep increasing
in the future. You are not going to reduce that requirement. So
number one, we do need to know where we are going. That is a
national-level political decision. We need to know how we are
going to do it militarily. That is ultimately a professional
military recommendation with the national political decision.
But it is going to need the resources. And we believe, at AIA,
that those resources are probably not going to fall much below
4 percent of GDP or 35 percent of that top line for investment,
whatever those decisions are, or those plans are going to end
up being hollowed out in one way or another. And the resourcing
part is a congressional responsibility and decision.
Ms. Hanabusa. Mr. Chair, I am out of time. So could the
other gentlemen send it in writing to me? Thank you very much.
[The information referred to can be found in the Appendix
on page 111.]
Mr. Shuster. Sure. And with that, Mr. West. And also let me
mention, Members, we will probably go for another round if you
have any more questions. Because I know I have a couple more.
Mr. West. Thank you, Mr. Chairman, and to the ranking
member and thanks to the panel for being here. And I spent a
couple of days in the military. And a lot of the frustrations I
saw, especially when you look at the FCS [Future Combat
Systems] program, Crusader, F-22, Advanced Amphibious Assault
Vehicle. In the last 20 years, we have gone from 546 Navy war
vessels down to 285, but yet, 10 years ago about 19 guys got
together. We spend $1.5 million on a Tomahawk Cruise Missile.
They hijack four airplanes and they flew them into buildings.
We have programs like the JTRS [Joint Tactical Radio
System] and the WIN-T [Warfighter Information Network-
Tactical], which the Army is saying that is one of their top
requirements for communications, but yet we are not funding it.
I would like to ask this question, your assessment: Do you
really believe that there is a huge disconnect between a
national security strategy, national military strategy and
then, of course, the requirements we send out to the defense
industrial base so that we can start developing a sensing of
the next 20, to 30, to maybe 40 years, of this military that we
have to have to be able to fight against, you know, what is a
very determined enemy that is not that much technologically
advanced. So I would like to hear your assessment on that. And
then what can we do to rectify that situation?
Mr. Watts. All right, I will take a stab at that one.
Look, let me just mention one very broad capability that we
have had really since the Second World War, and that is
overseas power projection of conventional forces. Associated
with that, one of the pieces that we have developed certainly
over the last couple decades has been long-range precision
strike, and frankly since Desert Storm, we have had almost a
monopoly in that area. Now, one of the problems going forward
is that technology is starting to proliferate, at least at the
short end range, guided mortars, guided artillery, guided
short-range missiles, and that is going to make power
projection much more difficult for us if you think in terms of,
say, something like Inchon in 1950, a traditional over-the-
beach amphibious assault. So that would suggest we are going to
have to make some substantial changes and adjustments.
I would be hard-pressed to think that we would like to get
out of the precision strike business. I think that is going to
be--that is an area which is fundamentally dependent on
networking, on ISR [intelligence, surveillance, and
reconnaissance] advanced capabilities that we have spent a lot
of money and time and effort developing, and in a broad sense
you wouldn't want to back out of that particular business long
term. Given the fact that the Chinese, for example, are going
fairly fast down the same path in developing anti-access/area-
denial capabilities against, say, surface combatant and
aircraft carrier, reaching out to ranges as far away from the
Chinese coast as Guam, suggests that the future of the carrier
battle group may be at risk. We have depended on that for
overseas presence and power projection for a long time. Those
are hard choices that I think the services are going to have to
make, so let me just mention that as one.
I mean, another area that I know is not conventional, but
to think about where our nuclear capabilities have gone since
the cold war ended, it would be nice if we could get, in my
lifetime, to a world without nuclear weapons. I am personally
fairly skeptical. I don't think we have convinced too many
others around the planet who possess nuclear weapons that it is
time to give them up and that they no longer have value, and
that is an area of the industrial base where we have preserved
the design capabilities at Lawrence Livermore and Los Alamos,
which as I am sure you are aware Secretary Gates and Secretary
Bodman, who was at [the Department of] Energy going back in
2009, basically observed we no longer have production
capabilities for a nuclear weapon, and that is an area where if
you really wanted to go back into that business, you would have
to start over again.
Mr. Chao. One quick comment. As long as we have a
requirements and acquisition system that takes 20, 25 years to
get something from concept to actually out in the field, you
are going to have always a fundamental disconnect between
strategy and what we are buying. I mean, in 1900 they were
planning against the war against, you know, the Germans or the
French or the Brits potentially, by 1920, right, we had just
fought the Germans, by 1940 fighting them again, by 1960 it is
the Russians, by 1980 they are at the top, by 2000 it is four
guys in an airplane, by 2020, to your question, Ms. Hanabusa, I
mean, who knows? And so shrinking, looking at the, again in
terms of your reform efforts, looking at shortening that cycle
can only be a good thing from the perspective of getting that
mismatch out of the way, and oh, by the way, shorter cycle,
which means more points of competition, more programs is very
healthy for an industry. One program every 20 years is really
unhealthy for an industry.
Mr. Shuster. Would you repeat the last thing you said? I
couldn't hear it. Just the last couple sentences.
Mr. Chao. One program, if I am running one program for 20
years, that is very unhealthy for an industry versus, you know,
versus not. I mean, this whole element of how long it takes us
to get a weapons system is really one of these core root cause
elements, and we solved part of that problem in the way we did
acquisition for the war because it created a really quick pull,
and we had very quick turns, right? And so we will have a
healthy base related to that. It is the other part of the
system which you guys are looking at from a reform standpoint,
I think that is part of the fundamental issue.
Mr. Downey. Quick comment, Mr. West. I think, as an old
soldier myself, I sympathize with your frustrations, I had them
as well. One thing that personally I would be leery to do is
predict too precisely who we are going to fight, where we are
going to fight, with what we are going to fight, and when we
are going to do it. Historically we have always been wrong when
we have done that too much. So part of the problem, I think, is
retaining the capability we need. We are not going to end up
buying everything that is wanted or designed, but when the
system gets to the point that you described, the possibility is
we won't buy much of anything, as Pierre said, and the
capability to do that will atrophy and migrate away, and we are
just not going to be able to reconstitute some of that. Some of
it will be very expensive, some of it may not be recoverable at
all.
Mr. West. Thank you, Mr. Chairman. I yield back.
Mr. Shuster. Thank you. Ms. Sutton.
Ms. Sutton. Thank you, Mr. Chairman. Thank you for your
leadership, and to the ranking member, thank you as well.
Gentlemen, thank you for your testimony. I have great concern,
as I am sure everyone here does, of the consequences of the
atrophy that you describe. I tend to believe that if you can't
make it, you are at the mercy of those who can, which is not a
good place for the United States of America to be. This is so,
so very, very important.
Mr. Downey, on page 5 of your testimony you talk about
other nations, including our closest allies, comprehend these
realities, and thus they have adopted systematic comprehensive
policies to sustain what they consider to be strategic national
assets. Can you expand on that for me, tell me who and what?
Mr. Downey. Yeah. Most major industrial nations do have an
industrial base strategy for their defense. I wouldn't go so
far as to say it is exceedingly successful and effective in all
cases, but France does, United Kingdom does, Germany does, I
believe China does, but the key that they tend to focus on is
what capabilities from a national standpoint they want to
retain. They don't always get it right, but at least it is part
of their process.
The British have the process of the defense white paper
system, which includes defense white papers. We do not include
industrial base considerations in our strategic planning
historically. In the most recent QDR there was exactly one
paragraph about industrial base, and nobody in the industrial
base that I am aware of participated in even developing that
one paragraph, let alone a strategy. Yet I sat in a meeting in
London a couple of years ago where the then British Defense
Minister met with the senior leaders of the British defense
industry and outlined where he was going to go, saying that he
had heard their concerns and that he was going to take care of
part of that by including in the strategy an effective outreach
program for foreign sales. Now, that may not be a complete
strategy, but it is at least a somewhat coherent one, and one
which we don't have as a coherent one.
Ms. Sutton. Well, I appreciate your answer. There are so
many questions. Let me ask you this: I mean, clearly I think
that maintaining a stable and strong and nimble industrial
policy is critically important. You talked about the need for
the strategic plan. I think the second component that you
really focused in on was communication, and if you could just
speak to the need for much better communication and
coordination between the Pentagon and industry than has been
our historical norm, in a nutshell, what do we do?
Mr. Downey. Yeah, in a nutshell, as I said, historically we
haven't done much of it for almost a 10-year period. During the
first decade, to my knowledge, there wasn't one meeting between
the Secretary of Defense and the collective leaders of the U.S.
aerospace and defense industry. That has been turned around.
Former Secretary Gates and current Secretary Panetta has begun
to meet with the leaders of the aerospace and defense industry,
and the industry has reciprocated by forming an industrial base
task force to look at the impacts with the hope that we can
help the Pentagon if they so choose, but it is--even if they
develop an industrial base strategy, if they do it without
industry, it would be like having a naval strategy without
talking to the Chief of Naval Operations.
Ms. Sutton. Well, the one question I have, as you talk
about the--even if all of those improvements take place, if we
make progress there, we still have the issue that this panel
has seen over and over again dealing with the communication
into smaller and midsize providers, so can you speak to that
issue as well? Because when you say industry, I am guessing you
are not talking about them, you are talking about----
Mr. Downey. No----
Ms. Sutton. You are talking about----
Mr. Downey. I am. And as a matter of fact, in our
association, for example, we have a supplier management council
that includes members of the supply base and that is
represented on our executive committee by one of their leaders,
currently Chuck Gray from a small company. So their
considerations are included in all of the work that we do and
all of the advocacy we do with the Pentagon and elsewhere.
Mr. Shuster. If you have further questions, we will start
the second round with you right now.
Ms. Sutton. That would be great.
Mr. Shuster. Sure.
Ms. Sutton. Thank you very much, Mr. Chairman. When you
talk about the--you specifically mentioned some capabilities
that you see atrophying from the heavy-lift capability, the
satellite capability, and the manned space capabilities. Part
of the challenge I face and maybe others do is how do you
quantify what that means to us?
Mr. Downey. Well, we are working on trying to get a better
handle on the impacts. One thing we do know, the first part of
that life cycle that begins to atrophy is the design
capability. As a program matures, the company who is making the
product has less and less need for the people who do design,
and so if they don't have other places to put them or other
programs that require design, then they are going to get rid of
them, and there are a number of design teams that have been
reduced or that have actually been disbanded because there is
no work for them, and it goes back to which ones do we not want
to have that happen to. I would probably suggest that right now
we wouldn't want to lose our capability to design a nuclear
submarine. The British went down that road and found they
couldn't reconstitute that capability, and about a dozen years
later they decided they needed it. And so I would hope the
Pentagon is looking at that much more carefully to decide which
of those capabilities and which of the skills represented by
the people that may be lost if the budget is decremented too
much they absolutely have to have and then come up with plans
to do it, and in some cases that may not seem the most cost-
effective thing, program by program, but on a national security
basis it might be the most cost-effective thing to do.
Ms. Sutton. Well, I share the frustration over the idea
that every expenditure--it is interesting what we are seeing in
budgeting here, that anything that doesn't appear as an
expenditure is obviously an efficiency, and that isn't
necessarily the truth, and so this whole concept of life cycles
and the cost of not investing, the cost of not doing things,
and I think that that is what we really need to help translate
in order to get some more sense back into the way we are
proceeding, not just in this, you know, in the industrial base
and certainly DOD, but frankly infrastructure, the cost of not
building infrastructure is not zero. It is still there, and it
is going to maybe be more costly and more inefficient. So
anybody else have any comment?
Mr. Chao. I am just going to make a comment to your
question, in the absence of a defense industrial strategy, we
are actually making one up by every acquisition decision we
make.
Ms. Sutton. Exactly.
Mr. Chao. It is getting done, so we should stop lying to
ourselves and admit that we are doing it and get to it. Because
also in the absence of that strategy, and I will say something
incendiary that will probably get me into trouble, but, you
know, in the absence of figuring out what is strategically
important to us, we focus on very strange things, so I have a
very detailed industrial base strategy related to black berets,
but I don't have one related to semiconductors.
Ms. Sutton. Right.
Mr. Chao. And the Chinese have set up a policy where they
are drawing in every technology where it would almost be
fiduciarily irresponsible for an executive not to put their
plant into China, right, because of the incentives they set up,
and we are letting it drift away. And so I think you are
hitting on exactly the right point about what is strategically
important, and if we don't get to it, we are going to find out
that that capability is gone.
Mr. Watts. If I could just add to that, in the kind of
fiscal environment that the Pentagon faces now and the
Department of Homeland Security and other parts of the U.S.
Government, the tendency is to start focusing on individual
programs and sort of addressing the question of, well, how much
can I cut this one, can I eliminate that one? And it seems to
me from a strategic standpoint, you first want to decide what
you really want to keep, and we haven't been doing very well at
that.
Just to touch on the point that Mr. West mentioned earlier,
if you look at the last three or four or five national security
strategy documents, they tend fundamentally, in my judgment, to
be wish lists without getting on to the difficult issues of
exactly how are we going to get from point A to point C or
point D, and so I think they have not been that helpful in
addressing these kinds of issues about what we want to keep.
Ms. Sutton. Thank you.
Mr. Shuster. Thank you. Mr. West.
Mr. West. Thank you, Mr. Chairman. Coming back to what we
talked about with the acquisition cycles, you know, one of the
things that I know that the Army has instituted is something
called the Rapid Equipping Force. A good buddy of mine is
heading that up. So what are your recommendations, things that
we can look at, things that we could do, things that we could
push for coming from this panel and from the Armed Services
Committee as far as how do we shorten that acquisition cycle
and how do we get more of these emerging technologies and
companies involved so that we can be a bit more adaptive
because the soldiers, sailors, airmen, marines are quite
adaptive on the battlefield, but it seems that we up here on
this aspect and in industry, we are not as quickly responding
and as adaptive.
Mr. Chao. You hit a great topic. We have painfully learned
those lessons over the last decade. One of the biggest things I
think you need to watch as a group is the tendency that once we
are gone to have forgotten those lessons. In fact, 200 years of
history says we will forget those lessons and go back to our
old habits, and so one of the key things we can do is how do
you embed those hard lessons learned into the system and do
that? Because there is a basic presumption that in some ways
there is a barbell-shaped market. One part of the market or of
the industry that is tied to this fight of today, very rapid
acquisition, leveraging commercial technologies, I am fighting
against guys with box cutters and spending $10 million
developing a device is not a smart thing. The troops know how
to do that.
There is the other end where it is near-peer adversary and
I do need these traditional players to do that, how can I get
them to move a little bit faster and cross-pollinate? Again,
don't extend the lessons too far in either direction, but the
number one thing I think we can do is make sure that the
mentality that is adopted there gets shifted into the core
process where appropriate, particularly related to some of
these new technologies where you need the fast turns. Think of
how obsolete the technology is inside some of those long 25-
year platforms we just talked about.
Mr. Downey. I am not sure there is a whole lot of new ideas
on that. Most of them have been identified and articulated,
number one, decide what we want, lock down the requirement, and
build to the requirement, preferably do that with some
cooperation between those who need it and those who are going
to build it, and reduce the impediments to building it and
doing it quickly and without excessive cost, and we know what a
lot of those are; excessive oversight, excessive paperwork,
excessive and nonmaterial audits. I had one of our CEOs [chief
executive officers] that told me that he had a program that had
ended over 3 years before. The auditors showed up, three
people----
Mr. Shuster. Mr. Downey, would you suspend for a second. I
have a little difficulty here. I don't want to miss what you
are saying.
Mr. Downey. Sorry, Mr. Chairman. That he had a program with
the Pentagon that had been completed about 3 years before.
There were only a handful of people who were actually on that
program, and the auditors showed up. There were actually more
auditors than had ever worked on the program, and he had to go
out and hire some accounting people on the back end. Now that
is cost, you know, and that is going back in the system. So Ben
Rich, who was the head of the fabled ``Skunk Works,'' pointed
out in his book that over his tenure the oversight and
paperwork had increased to the point that in his words we put
more and more into the big end to the final to get less and
less out the small end, and it just got worse and worse, and he
wrote that in 1994, so you can imagine what it is like at this
point.
Mr. Watts. Back in 2006 General Kadish, when he retired,
did an acquisition assessment, and one of the recommendations
in that report was something called ``time-certain
acquisition'' where you set a 4- or 5-year hard [stop], you
either deliver the product by then or the program is canceled
kind of an approach. I understand that when they did the
outside look at the last QDR, General Larry Welch was involved
in that. He has a lot of acquisition experience, and
essentially made the same recommendation. You will find it in
Gansler's book, you will find it in our report. The caveat that
goes with that, of course, is you have to ruthlessly adhere to
the time-certain delivery schedules and not sit there towards
the end of the program as it is starting to slip in terms of
schedule, and cost is going up, and decide, well, we spent all
that money, so we can't afford to actually cut it off. That is
a very difficult thing, as I am sure all of you know in terms
of listening to industry constituents from your States.
Lastly, I will just mention, you know, to touch on what
Fred talked about, about the oversight, I recently talked to
some people from one of the major contractors where they had a
product--it had originally been built for one of the services,
and now they were starting to sell commercial versions of it,
and the difference in oversight at government contractor
oversight of the program actually in the factory was the
difference between 5 or 6 on the commercial side and 100-plus
on the government side, and as Fred correctly said, that is
cost. There is just no doubt about it. It also makes schedules
slip.
Mr. West. Thank you, Mr. Chairman. I yield back.
Mr. Shuster. Thank you. Ms. Hanabusa.
Ms. Hanabusa. Thank you, Mr. Chair. Mr. Chao--and by the
way, gentlemen, I still want your writing to my last line of
questions, I want it in writing your responses.
But Mr. Chao, let's move on. I like your concept of policy
by acquisition. I think that is a great way of putting it, and
that is probably what we are doing. I also went over your sort
of your slide show, and what caught my eye was, of course, the
second page that says a few ways to think of industrial policy
affairs. One of the things in here that causes me somewhat
concern, and I would like to go over it with you, you talk
about the life cycle of technology industry sectors, and it is
this curve that ends up with stability decline, and you have
all these other things on the bottom, and it basically points
to fewer competition, and that is really the purpose of, I
think, this committee. We were looking at as we began to look
at the cuts in the defense budget, we were actually more
concentrating on small and medium-sized businesses because the
big guys will, as your chart in here shows, they practically
have everything else. But this is troubling to me because what
you seem to be saying is that we are just headed for fewer
competitors and we are headed for some kind of decline. Am I
reading your chart correctly?
Mr. Chao. You are from a technological standpoint to the
extent that every industry runs through its normal cycle, and
the commercial industry runs through it much faster, and the
cycle gets restarted. There is a part of the curve that reboots
the cycle, and so if you want to be harsh about it, the
technologies we are most stressed about--aircraft, space
launch, shipbuilding--those are technologies of the 1910s,
1920s, right? Now, the difference between the commercial world
and defense is actually we still use those technologies. So
that decline phase goes on for a very long period, which is
why--or I would call it stability in terms of maturity of
technology, and so all it says is that the policies and things
you want to focus in on are different. That is going to be a
negotiated relationship with that because of the age of those
technologies there will naturally be fewer competitors, period,
full stop.
Ms. Hanabusa. But if we put the policy by acquisition and
overlay that----
Mr. Chao. Right.
Ms. Hanabusa. We also seem to be saying that because we are
continuing maintaining those old technologies of 1910 of which,
as you are saying, we may put a new coat of paint or we may
beef it up a little bit, but we are seemingly then doing what
you are kind of guarding or telling us to guard against, which
is we are maintaining the old technologies because we, by doing
that, we are making, we are setting the policy through our
acquisitions.
Mr. Chao. And in some cases you should because they are
still very valid technologies. So to date no one has yet sort
of come up with a substitute for the submarine, right?
Ms. Hanabusa. Right.
Mr. Chao. And so it is a core capability set. No one has
come up with a substitute for, again, the heavy space launch.
You have some guys who are trying to do that. And that is why I
think as you look at this, and to Mr. Downey's point and Mr.
Watts' point, you know, it is where you should be spending your
time because it is going to be the thorniest problems of how do
I keep these capabilities alive while at the same time you
should be spending R&D money. We should be encouraging the
young innovators to see who is going to come up with an answer
for that because I guarantee you something, if we don't, the
adversaries will. They don't have $700 billion to spend on
sustaining that base. They are trying to solve the exact same
problem at one-tenth the cost and, guess what? That forces them
to be really innovative, which is why they come up with box
cutters or they come up with drones or others.
Ms. Hanabusa. While I still have you, the barbell, which is
what you were mentioning I think in relationship to Congressman
West, you have it also in your handout. I am trying to
understand slice one and slice two, and if you can do that very
quickly for me.
Mr. Chao. Yeah, it is just two different ways of looking at
it. So one way is to think about it from the dynamics of the
left-hand side of the barbell which is tied to the fight of
today. It is very much again pulling technologies off the
shelf, think of the MRAP [Mine Resistant Ambush Protected
vehicle], think of those technologies. In fact, back to the
ITAR issue, three or four of the five designs were overseas
designs, right? That was able to pull the more traditional side
of it is our old stately system of acquisition that we know and
love and sort of, you know, moves along. That is one way of
thinking about it.
The other way of thinking about it also is from the types
of companies. The smaller, younger, more innovative ones are
the ones that we have found that have been taking advantage of
[the] rapid acquisition system. I am not going to give the
creation of the building of FCS or the GIG [Global Information
Grid] or large networks or F-22 to a small start-up. It is just
not the right scale and appropriateness. So you need both ends.
The biggest dilemma for the companies themselves is can
they operate on both ends of the barbell or not, right? And so
that is what they are struggling with and they are beginning to
question that once the war is over will the left-hand side of
the barbell live anymore? I would submit to you SOCOM [Special
Operations Command] lives in that world all the time, the
Intelligence Community lives in that world all the time, so
there is an enduring market.
Ms. Hanabusa. Thank you. Thank you very much. Thank you,
Mr. Chair.
Mr. Shuster. Thank you. You mentioned about the MRAP, and I
got to know a Special Forces colonel, he is not a colonel now,
he is a general now, but he was in Somalia, and he talked about
they had in Somalia deployed some up-armored vehicles, I don't
know which country, South Africa or somewhere, and he came back
after Somalia and said we need these if we ever go into an
urban environment again. Well, you know, we just pooh-poohed
that, and then we had the situation in Iraq and we should have
learned from that, but going back to the point we don't predict
very well what we are going to be doing, and I guess we don't
listen to people that have been actually in those situations
and know what they are talking about.
You had mentioned earlier that Secretary Panetta and
Secretary Gates had started to engage at least the large
defense contractors. Is DOD doing anything, in your view,
sufficient enough to reach down to the mid-level and smaller
companies to engage with them in some kind of dialogue? Can you
talk about that a little bit?
Mr. Chao. It is harder. There are things like the Mentor-
Protege programs that, you know, I find useful. It is back to
the other entities who sort of are tasked to do that like DARPA
that has been reaching, but in dealing with those companies,
that has been one of their biggest frustrations has been they
don't even begin to know where to start, how to interface, how
to, you know, how to begin to get in. They would love to have
an ombudsman or somebody that could, you know, be their
champion. They look to the small business sort of advocates,
you know, to do that. As you know, some groups are better than
others in terms of following that. It is a perpetual sort of
grinding of the gears.
Mr. Shuster. That would be something you would recommend
for us to look at?
Mr. Chao. Yeah.
Mr. Shuster. Having somebody in there that is looking out
for the smaller guys more aggressively? I guess there is an
office at DOD that is supposed to be doing that, and we are
going to have them in front of us, but I get the sense that
they don't have too many resources behind them to be able to do
that.
Mr. Chao. There is, and then again the thing to be careful
about is setting, you know, the small business set-asides which
I understand is part of a policy also has sometimes some
unintended consequences, right?
Mr. Shuster. Right.
Mr. Chao. There are companies that have loved sticking
within that and don't want to graduate because once you
graduate you are in the maelstrom, and that is not quite what
we want them to do. We want them to use that to get to a
certain level, then graduate to the mid tier without having to
sell out, and so we also have to be very vigilant about these
one-size-fits-all things.
Mr. Shuster. Mr. Downey.
Mr. Downey. I think they are, and I think your witness in
the coming hearing will be able to talk to a lot of that. One
of the problems is the Pentagon actually coming up with an
inventory of who the aerospace and defense industrial base
suppliers actually are. We don't really have an inventory. The
OEMs [original equipment manufacturers], the large producers
have a pretty good handle on what their supply chain is, but
there is not much of a horizontal, so Brett Lambert, who is the
Deputy Assistant Secretary, does have a program that they have
been implementing, but there are a lot of them, I think 25,000
suppliers is kind of a guesstimate.
Mr. Chao. 97,500.
Mr. Downey. 97,500.
Mr. Chao. Essentially everybody.
Mr. Downey. And so that is pretty hard. My own personal
opinion is you should look at it. Doing business with the
Pentagon is difficult, intimidating, and for small companies
darn near impossible. To have the lawyers, accountants, and
advocates that are necessary to understand the Federal
Acquisition Regulations and operate successfully without
penalty in that world scares away a lot of people and is
scaring some of the people who are actually doing it now out of
the business, and I think if we don't get a handle on that we
are going to lose capability that we wish we had.
Mr. Shuster. Right. Mr. Watts, any comments?
Mr. Watts. Well, I just touch on the ITAR's kinds of
constraints on being able to access the global defense industry
is, really is a significant constraint these days. And the
specialty metals thing came back in Iraq when people had
started running into IEDs [improvised explosive devices], you
had Humvees that were not armored. You could get access to
additional armor to add to the Humvees in country, but that ran
into the very amendment kinds of restrictions which sort of
said to people really if you are going to follow the rules and
regulations you are going to have to go all the way back to the
United States to get armor plate that is available locally. I
mean, these kinds of constraints I think in that particular
case probably led to some people dying, and, you know, those
kinds of constraints it just seems to me we do need to do
something about.
Mr. Shuster. And one final question. What role, what is the
appropriate role for the industry to work with DOD to assessing
the health of the structure, you know, as we move forward? What
is the role of industry?
Mr. Watts. DOD is going to supply an awful lot of the data
that the Pentagon doesn't have, for a starter, and, you know,
the more you can get the companies to work as a team with the
Defense Department or Homeland Security I think the better off
you are going to be.
Mr. Shuster. Do we have enough laws in place, in your view,
that stop us from doing that, keeping these, you know, arm's
length instead of bringing them in and being a part of the
team?
Mr. Watts. I go back to a program that in my industry days
I was really familiar with, the B-2 bomber, which is not
everybody's favorite acquisition for a variety of reasons,
including the unit cost at the end of the program, but that
program was eventually won by Northrop [Grumman]. The
competitor was Lockheed [Martin], who had built the F-117, and
the Air Force basically wanted a high flyer, it was going to be
a high-altitude penetrator, period, end of story. Two years or
so into the program, the Air Force changed their mind, wanted
low-altitude penetration, and as I discussed with some of the
staffers for the panel a couple weeks back, that required a
major wing redesign except the airplane was a flying wing. You
imposed a lot of cost and a lot of delay by having essentially
requirements creep in that particular program. We haven't
talked too much about the requirements process, but that is
another piece of this whole system which, in my view, could use
a lot more coherence and discipline.
Mr. Shuster. Mr. Downey.
Mr. Downey. Mr. Chairman, there are in fact impediments to
adequate cooperation. Some of those are cultural, some of them
are institutional, some of them fall into the category of laws
and regulations, and some of them are absolutely correct. At
some level you do have competition and you do have a need to
protect proprietary information on both sides, but increasingly
industry views the relationship, and I am not talking about
just in the last few months or even the last couple years, as
increasingly adversarial. Witness the most recent letter out of
the administration that would tighten or reduce the ability of
military officers to participate in widely attended events, and
so you end up with the problem of what is intended, what is
written, what is interpreted, and when you get down into the
organization, it is just an awful lot easier to avoid the whole
thing than defend yourself or try to explain it later.
Mr. Shuster. And I think it is a terrible problem. They
don't even want people to talk to people, and when it is
completely appropriate and necessary. Mr. Chao.
Mr. Chao. It is a huge issue, and it is politically
difficult and hard to raise, and it is another one where it is
creating a really unintended consequence. If I can't talk to
people and I can't sort of get basic information, so what
happens? You are then forced to recruit retiring military
people because that is the only way you get to understand what
is going on inside, which then raises the specter of the issue
of what is going on, and so I tighten laws about that, and then
I get even more and more removed every step of the way until
the point where I can't talk to my basic customer in order to
understand what is going on. And that then has second-order
consequences. But to sit there and say I want to speed up the
revolving door is political suicide, and so it is a topic that
we don't really touch at. But again, I think you are touching
on one of these core fundamental issues. If you can figure out
a way to gently look at the issue, I would really encourage you
to do so.
Mr. Shuster. That is what we hope to, but that brings us
right back to what Mr. Watts started out saying, this is not a
free market system because in the free market system you go to
the customer, and say what do you want? Explain it to me, and I
will try to come up with something that satisfies your needs.
So it brings us right around, and that is one of the things we
need to explore because we know it is a big problem.
Again, I want to thank all of you for giving up your time
today and your expertise. I am sure as we move forward, Ms.
Hanabusa, I think she has some questions, and we may have
questions further that hopefully we can talk to you and get
your input because I had--just in this room a couple weeks ago
we had a meeting with former Secretary Rumsfeld, and I said we
had this panel and, you know, what do you see at the Department
of Defense? He looked at me and smiled and he said, if I was
advising a small business, I would tell them, don't do business
with DOD, he said it is too difficult. His quote, his
comparison was it is like sleeping with a hippopotamus.
Eventually it is going to roll over and crush you, and it will
never know it did it to you. So it was a very concerning
comment, but I am not willing to take that point that I think
it is critical. And he did say also that a lot of the great
ideas, I mean if not all the great ideas, the new technologies
are coming from small and medium-sized companies that are
nimble, but he said it is so difficult. So that is what
hopefully we are tasked here, and we will come up with some
solutions to change that, to change the culture, to change the
laws and make sure that those small and medium-sized companies
continue to be a very important and--very important part of the
new technologies that emerge to protect our warfighters and our
Nation.
So, again, thank you all very much for being here, and we
have a field hearing Friday in Akron, Ohio. Looking forward to
it. I have a list here. You have got a number of companies, so
I'm looking forward to that. As we go to Ohio on Friday I hope
all our members or most of our members can join us. Again,
thank you very much, and this hearing is adjourned.
[Whereupon, at 4:37 p.m., the panel was adjourned.]
=======================================================================
A P P E N D I X
October 24, 2011
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
October 24, 2011
=======================================================================
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
DOCUMENTS SUBMITTED FOR THE RECORD
October 24, 2011
=======================================================================
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
October 24, 2011
=======================================================================
RESPONSES TO QUESTIONS SUBMITTED BY MS. HANABUSA
Mr. Watts. See attachment [Appendix, page 103]. [See page 16.]
Mr. Downey. [The information was not available at the time of
printing.] [See page 16.]
Mr. Chao. [The information was not available at the time of
printing.] [See page 16.]
?
=======================================================================
QUESTIONS SUBMITTED BY MEMBERS POST HEARING
October 24, 2011
=======================================================================
QUESTIONS SUBMITTED BY MS. HANABUSA
Ms. Hanabusa. In your testimony, you mentioned that the Independent
Panel that writes the Quadrennial Defense Review does not communicate
well enough with defense industry while conducting their research.
Specifically, who in industry does the panel need to communicate more
with?
Mr. Downey. [The information was not available at the time of
printing.]
Ms. Hanabusa. Please explain in more detail the connection between
Wall Street and the defense industry.
Mr. Chao. [The information was not available at the time of
printing.]
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