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Trump’s Industrial Base Report Blames China, Sequestration

Posted by Paul McLeary on

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A submarine undergoes maintenance at the government-owned Norfolk Naval Shipyard.

PENTAGON: Congress and China have emerged as the primary culprits for the weakening the US defense industrial base. Those are the most striking findings of a new White House report that takes a deep-dive into the state of defense manufacturing in the United States, sounding alarm bells over the decline in capability and the rise of China’s industrial might.

Nothing, the report indicates, has harmed America’s industrial base more than the self-inflicted harm of sequestration.

“The decade-long reliance on Congressional continuing resolutions has exacerbated uncertainty, both for DoD and across the supply chain. Combined with the adverse impacts of the Budget Control Act, these fluctuations challenge the viability of suppliers within the industrial base by diminishing their ability to hire and retain a skilled workforce, achieving production efficiencies, and in some cases, staying in business,” the report says. “Without correcting or mitigating this U.S. Government- inflicted damage, DoD will be increasingly challenged to ensure a secure and viable supply chain for the platforms critical to sustaining American military dominance.”

While sequestration is listed as the top problem, China gets many more mentions (emphasis ours):
Predatory practices including state-sponsored dumping, public subsidies, and intellectual property theft are destroying commercial product lines and markets of domestic DoD suppliers,” the report says. “The loss of commercial business can lead to the loss of domestic production capabilities essential to U.S. defense and essential civilian needs. Impacted materials are widely used across multiple DoD systems and all major defense sectors (land, sea, air, and space systems).”
“In multiple cases,” it notes, “the sole remaining domestic producer of materials critical to DoD are on the verge of shutting down their U.S. factory and importing lower cost materials from the same foreign producer country who is forcing them out of domestic production…..”
“Without relief from unlawful and otherwise unfair trade practices, the U.S. will face a growing risk of increasing DoD reliance on foreign sources of vital materials.”
The report fits squarely within the Trump administration’s growing trade war with China, and broad concerns throughout the US government that Chinese industrial might in everything from auto production to semiconductors and microchips has pulled ahead of American capacity.

The 130-page report mentions “China” or “Chinese” a whopping 229 times. In the case of China having cornered the market in critical rare earth metals which are central to the US defense industry, it claims “China’s domination of the rare earth element market illustrates the potentially dangerous interaction between Chinese economic aggression, guided by its strategic industrial policies and vulnerabilities and gaps in America’s manufacturing and defense industrial base.”

Breaking Defense reviewed a copy of the report, due to be released by the White House on Friday afternoon with President Trump and Deputy Secretary of Defense Patrick Shanahan. Defense officials said that the report’s specific recommendations are included in a classified annex, but that they expect money to be budgeted beginning next year to help bolster the industrial base where needed, particularly in batteries and fuel cells.

“There will be requests for additional money” in upcoming budgets, Eric Chewning, deputy assistant Defense Secretary for industrial policy, told reporters here Thursday evening. “But I wouldn’t think of this just as an additional ask for money. We also need to be spending more wisely, This isn’t just an investment fix. There’s also legislative fixes; there’s policy fixes; there’s regulatory fixes.”

Alongside Chewning was Ellen Lord, the Pentagon’s top acquisition executive, who added, “we are working on a number of things…but this is a policy issue, a technical issue, an education issue, a workforce issue — it’s a whole of government issue.”

The report does call for direct investment in smaller manufacturers most vulnerable to sequestration, spending caps,  and the late budgets passed by Congress over the past decade. The Pentagon’s Manufacturing Technology and Industrial Base Analysis and Sustainment programs will help address “critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure.”

Both officials underscored that the Labor and Energy departments were involved in crafting the study, and will have a hand in implementing its recommendations.

With the economy having shed millions of manufacturing jobs in recent years, the Pentagon is concerned over a “skill atrophy” that has taken hold, especially among skilled workers who can operate complex machinery so critical to making next-generation weapons systems. The report notes that some 17,000 American companies stopped working as prime contractors for the DoD between 2001 and 2015.

Some of the big takeaways:

China, China, China. The US competitor is all over the report, and is described as “a significant and growing risk to the supply of materials and technologies deemed strategic and critical to U.S. national security; a challenge shared by key allies such as Germany and Australia.

Congress. Top among the issues that the report fingers as problems are the long effects of sequestration and years-long uncertainty of government spending, both of which have played a hand in driving small manufacturers out of the defense space.

The Navy has been hit the hardest. Of all the services, manufacturers of shipbuilding components have been taken the deepest cuts due to the globalization of industry over the last 20 years. The contraction “limits competition among U.S. suppliers of Navy components,” forcing the Navy to rely on single and sole source suppliers for critical components.

Eric Fanning, president of the Aerospace Industries Association, said in a statement that his group is “pleased to see that the Administration’s assessment includes measures to: increase our focus on science, technology, engineering, mathematics, and other tradecraft; reduce the personnel security clearance backlog; pursue advanced technology to counter future threats; develop shared industrial base strategies with our allies and partners; and, avoid reliance on unstable or single-source providers.”

Examples of a weakened industrial base from the report:

  • There currently exists only one domestic source of ammonium perchlorate, a chemical widely used in DoD propulsion systems. Foreign sources exists, but maintaining a domestic capability is critical to national security.
  • filed for bankruptcy, citing a decline in the military and commercial helicopter market. Without a qualified source for these castings, the program will face delays, impeding the DoD’s ability to field heavy lift support for Marine Corps expeditionary forces.
  • Domestic printed circuit board manufacturing struggles to compete in the global marketplace. Since 2000, the U.S. has seen a 70% decline in its share of global production. Today, Asia produces 90% of worldwide printed circuit boards, and half that production occurs in China. As a result, only one of the top 20 worldwide printed circuit board manufacturers is U.S.-based. With the migration of advanced printed circuit board manufacturing offshore, DoD risks losing visibility into the manufacturing provenance of its electronics.
  • ASZM-TEDA1 impregnated carbon, a defense-unique material provided by a single qualified source, is subject to a single-point-of-failure and demonstrates a capacity constrained supply markets. A lack of competition with other potential sources precludes assurances for best quality and price. While ASZM-TEDA1 is used in 72 DoD chemical, biological, and nuclear filtration systems, the current sourcing arrangements cannot keep pace with demand.
  • The high operational tempo of the Navy in recent years, along with a lack of steady funding for maintenance and modernization, has resulted in a backlog of repair work across the nuclear and non-nuclear fleet. Coupled with increases in new ship construction, many suppliers are experiencing a shortfall in their capacity to perform work and manufacture products.
  • U.S. military “night vision” systems are enabled by an image intensifier tube, a vacuum sealed tube that amplifies a low light-level scene to observable levels. The U.S. is reliant on a German supplier for the image intensifier tube core glass, a DoD-unique product with low demand compared to commercial glass production. While the German supplier manufactures the core glass in batches every few years to replenish a U.S. buffer stock, we still lack a domestic supplier, creating vulnerability in the night vision supply chain.
  • In 2017, a semiconductor chip foundry used in a voltage control switch (used in all DoD missiles systems) was purchased by another foundry. A 5th-tier supplier, the voltage control switch company notified its next tier customer of the foundry closing and received an end-of-life buy order for what was considered enough supply to allow time to qualify a replacement voltage control switch. DoD was not informed of the issue or consulted on the end-of-life quantity until the opportunity to stockpile had passed, at which point it became evident that the end-of-life buy, intended to last 3-5 years, would only last 6 months, putting U.S. missile systems at risk.

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