Over the next fifteen minutes, I’d like to explore what military transformation means for the defense industry by offering answers to three questions:
— First, how important is transformation as a driver of demand for defense goods?
— Second, how does transformation change the composition of demand for defense goods?
— Third, how are major defense companies responding to the requirements created by transformation?
Before answering these questions, it’s useful to describe where the defense industry currently stands with regard to the broader economy and the political system.
We often hear descriptions of U.S. defense spending that make the Pentagon seem like a sprawling colossus of nearly unimaginable power.
America, we are told, outspends the ten next biggest military powers combined.
This year’s supplemental spending request for Iraq, by itself, is bigger than the military budget of any other country — and, in fact, bigger than the economy of Iraq.
You could easily infer from such comparisons that America must have a huge defense industry exerting vast economic and political power.
Well, it isn’t so.
The entire defense industry generates barely half the revenues of Wal-Mart, and claims a mere one percent of gross domestic product.
Its profits are average at best, and its political influence has been waning for a generation.
There’s no question the industry is unique — it’s so unique that some analysts think it’s incapable of competing in normal markets.
Viewed against this backdrop, the sudden popularity of military transformation looks like the latest evidence of how little control the industry has over its fate.
That’s what happens when you only have one customer that matters — and a capricious one at that.
It’s important to keep the defense industry’s circumstances in mind as transformation unfolds, because this sector can’t tolerate another decade of uncertainty like the last one.
Much of the sector is in an advanced state of decay, and wouldn’t survive the cancellation of major weapons programs.
We are already well on our way to having only one producer of fighters, submarines, launch vehicles and the like.
Is Transformation An Important Demand Driver?
With that uplifting preface, let me now turn to my first question.
Is transformation an important driver of demand for defense goods?
The answer clearly is yes — but as with other nascent economic or ideological forces, it will take time for the impact to become fully apparent.
Some who have not paid close attention to the ferment in defense circles over the last decade think that transformation is a passing fad that will wane when Secretary Rumsfeld departs.
Others think that it is an idea whose time may never come, because of Rumsfeld’s inability to redirect the modernization plans of the military services.
Those views are wrong.
Transformation is a deeply-rooted movement with broad bipartisan support, and Secretary Rumsfeld has built a cadre of senior military supporters who will carry it forward whether he stays or not.
Fundamentally, transformation is about remaking the Cold War military by applying new technology and tactics to emerging threats.
The need to undertake such a makeover has been expressed in every quadrennial review, joint vision statement, annual report and outside assessment of military plans since the mid-1990s.
But transformation is more than just a response to threats and opportunities in the external environment.
It is also an ideology — an “emerging theory of war” as Admiral Cebrowski puts it — that has a cultural impact beyond its material manifestations.
It separates military leaders into those who live in the future and those who live in the past, with negative career implications for all who resist.
Given this combination of external need and internal pressure, transformation has become a powerful force in every facet of Pentagon activity.
It has spawned a wholesale revision of investment priorities, contingency plans, warfighting strategy and the unified command structure.
Nonetheless, some observers doubt that transformation is a big driver of demand for defense goods.
They look at the Air Force and see a modernization plan still heavily skewed toward fighters.
They look at the Navy and see a modernization plan top-heavy with the signature systems of traditional warfighting communities.
Superficially, it seems little has changed since the Clinton years.
However, that is an optical illusion — change may be gradual, but it is pervasive.
Many of the biggest programs — such as the Future Imagery Architecture, the DDX destroyer, the Comanche helicopter and the Virginia-class submarine — probably will not progress as planned.
For the most part, they will be cut back to make room for more transformational efforts.
The Future Imagery Architecture will fill a near-term gap in collection needs, and then give way to systems offering better coverage.
The DDX will migrate out of land-attack missions and into missile defense faster than originally planned.
The Comanche helicopter, already slashed in transformation reviews, may disappear entirely as unmanned vehicles and joint assets offer better solutions to Army reconnaissance needs.
And the Virginia-class submarine will not be produced at planned rates as interest shifts to converting Tridents and pursuing other ways of gathering signals intelligence.
These acquisition changes are not occurring because of pressure from unfunded contingencies, the prevailing pattern of Clinton years.
The $87 billion supplemental for Iraq and Afghanistan has taken most of the budgetary pressure off procurement.
The changes are occurring because of transformation — because of new operating concepts and technologies that make programs inherited from the previous administration look obsolete.
Consider the case of the Army’s premier network-centric warfare program, the Future Combat System.
The Army has cancelled or restructured 48 programs to make it happen, freeing up $22 billion through 2009.
That’s a lot of changes, and the changes will multiply as transformation moves forward.
The Bush Administration plans to spend a quarter-trillion dollars on its six transformation goals during the remainder of this decade, and much of that money will come out of existing programs.
So if you doubt that transformation is a driver of demand for defense goods, you just haven’t been paying attention.
How Does The Composition of Demand Change?
Let me turn now to the second question that I posed.
How does military transformation change the composition of demand for defense goods?
There’s a simple answer to this question, and there’s a complicated one.
The simple answer can be obtained by combing the public pronouncements of policymakers for references to technologies deemed transformational.
You didn’t need to wait for the new millennium to compile such a list — presidential candidate George W. Bush provided one in a campaign speech about national security delivered in 1999.
In that speech, delivered two years before 9-11, the president-to-be said he would give his defense secretary “a mandate to challenge the status quo and envision a new architecture of American defense.”
That was the real beginning of Bush-era transformation, and the candidate cited several technologies as cent
Find Archived Articles: