Defense Industrial Base: Second Sources Not Affordable

Author(s): Loren B. Thompson, Ph.D.
Posted in: Defense

Issue Brief

The 2010 Quadrennial Defense Review has produced the most competent, coherent report ever generated in the history of that much-maligned process. It is not a sweeping vision of military transformation, but rather a practical assessment of the security challenges America faces and the steps needed to address them. The report’s only real defect lies beyond the scope of the exercise: it prescribes a force posture that is not affordable, even though every element of the proposed posture is needed. The sad truth is that America’s economy has been in steady decline since the new millennium began, and it simply isn’t realistic to expect that five percent of the world’s population (us) can continue sustaining nearly fifty percent of global military outlays.

Last week, Secretary Gates told Congress that if the military got less money, then forces would have to shrink. However, there are plenty of other steps that can be taken to save money such as eliminating unneeded bases and slowing the growth of benefits for defense personnel. One such step is to change the department’s approach to the defense industrial base. The QDR report commits the defense department to strengthening the industrial base, but it doesn’t reflect much understanding of what that means in an economy that is losing ground to other nations. For instance, it seems like nothing more than common sense to coordinate weapons purchases with administration economic goals, and yet defense policymakers still resist allowing economic concerns to influence their weapons deliberations.

Even within the confines of the military marketplace, policymakers do not seem to grasp what the slide in American economic power means for their future choices. The Defense Science Board and the Defense Business Board have recently issued reports calling for more competition in the procurement of military hardware. That might have been a feasible idea ten years ago when America was generating a third of global output, but now that it has fallen to less than a quarter and is pursuing a more labor-intensive security posture, preserving multiple sources of military systems isn’t an affordable approach. The reason second sources aren’t affordable is because the Pentagon is typically the only customer for military items, meaning it must pay all the costs for competing design teams, engineering staffs, production lines, and maintenance systems.

As Secretary Gates has noted in the case of General Electric’s proposed alternate engine for the F-35 joint strike fighter, the high cost of sustaining a second source isn’t likely to be covered by any savings that the resulting competition produces. Instead, the presence of a (subsidized) second source weakens the primary source while leading to collusive pricing when both sides realize they are guaranteed some portion of the market for their product. This is why nobody proposes establishing a second source for the radar or landing gear on the F-35: it would just waste money. So instead of pursuing the unaffordable competitive sourcing model, what policymakers need to do is learn how to elicit price and performance discipline from sole sources.

In addition, policymakers should be focusing on key product lines where the sole surviving supplier is facing bleak prospects. For example, the administration’s decision to terminate NASA’s manned mission to the Moon raises grave doubts about the future of the solid rocket motor business — a business that serves many military needs. And the C-17 transport is the last large aircraft designed to military specifications being built in the U.S. Allowing either of these product lines to wither can’t be reconciled with strengthening the defense industrial base.