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As the U.S. armed forces struggle to adapt to the post-Cold War environment, many of their challenges are mirrored in the country’s defense industrial base. U.S. defense companies are consolidating, cutting costs, and downsizing—shedding one employee every 30 seconds—to ensure their continued ability to provide for the nation’s defense needs.
From wind power to nuclear power, from cast-iron cannonballs to submarine- launched ballistic missiles, from hand-held sextants to satellite-based navigation, much has changed in the 220-year history of the U.S. Navy. But its basic mission—protecting the nation from seaborne hostile forces and projecting the power and influence of the nation across the seas to foreign waters and shores in both peace and war— remains essentially the same.
The defense industrial base that underpins the Navy and the other armed forces also continues to perform its long-standing role as the “arsenal of democracy.” In many ways, it is our “fifth armed force,” because without the factories, skilled workers, and advanced technology of the U.S. industrial base, our nation’s military would not have the tools needed to carry out its great responsibilities. If it is true, as Napoleon once said, that “an army marches on its stomach,” then it is equally true that the U.S. armed forces rely on the spirit and muscle of hundreds of thousands of people working at developing, testing, and manufacturing the systems that keep them the best-equipped military in the world.
Unfortunately, the defense industrial base today is faced with many profound and troubling challenges as our nation adjusts to the “new world disorder.” For nearly a half-century—a period accurately characterized by the expression “balance of terror”—we prayed for a peaceful resolution of the Cold War, with no armed conflict, with freedom as the victor, and with democ-
racy breaking out all over the Soviet Union. Even now, it is difficult to accept that this is precisely what happened. But from this almost unimaginably positive end emerges another almost equally wrenching question: What do we do now to promote and defend the peace?
Sometimes it seems that the principal effect of the end of the nuclear balance of terror has been to make the world safe—safe for smaller wars. Jane’s Defence Weekly recently counted 27 military conflicts in the world, 12 flash points, and 31 areas of tension—posing excruciating dilemmas for Americans as we seek to balance our aversion to human suffering against the impracticality of becoming “911 America.”
Added to this volatile mix is the sobering fact that the states of the former Soviet Union still have an estimated 26,000 nuclear weapons in their arsenals, that three other nations have publicly confirmed they have “atomic devices,” and that an estimated nine additional countries either covertly have—or are working to develop—their own nuclear capabilities. India’s Minister of Defense reminded us of the world we are entering in his comment on the real lesson to be learned from Desert Storm:
“Never fight the Americans without nuclear weapons.”
Coping With Victory
To cope with fundamentally different roles and responsibilities, the defense industrial base has been undergoing profound change. One way to understand our response is in terms of U.S. commercial industry, which has been going through a wrenching downsizing over the past decade, prompted by the presence of Japan on the world scene. The U.S. defense industry is experiencing a similarly wrenching downsizing this decade, prompted by the absence of the Soviet Union from the world scene. Our challenge is to focus that process in the proper direction so that the United States retains the numerical and technological capabilities it will need in a world that remains both volatile and dangerous.
Military historian Walter Millis once wrote, “War challenges virtually every institution of society—the justice and equity of its economy, the adequacy of its political systems, the energy of its productive plant, the bases, wisdom and purposes of its foreign policy.” In today’s environment, Millis would see that in each of these areas— the economy, the political system, our productive plant, and foreign policy—the challenges are as great now as they ever were during the Cold War.
For most of the latter half of this century, the American public looked to our forces to prepare for war successfully—and by so doing, to deter war. Today, and for the foreseeable future, the public is looking to us to wage peace, that is, to deter small wars as well as big ones—a challenge that is no less daunting.
It is clear that in today’s world, the United States can safely afford to shrink its defense industry—and indeed we are. The important question is: “How far?” My belief, based on more than one-third of a century serving in the Pentagon and in the defense industry, is that we are perilously close to building a hollow defense industrial base— to borrow the phrase used to characterize the episodic weakening of our military forces.
The U.S. military today is operating within a Defense budget that has been cut by roughly 35% in real purchasing power over the past decade, the result of which has been to bring overall spending to the lowest share of gross domestic product since before Pearl Harbor. (See Figure 1.) The defense industrial base, however, has undergone an even greater reduction, experiencing a 68% drop in that part of DoD spending that goes for procurement of weapon systems and other items used by our military forces. With the infrastructure part of the DoD budget down only 18%, it appears that the budget is shifting away from the balance needed to maintain an effective fighting force.
Among other things, the end of the Cold War has made it possible for our nation to reap a long-sought peace dividend. One measure of this dividend is that more than $450 billion already has been diverted from Defense budgets to other purposes over the last five years. Disappointment over what some view as the seemingly modest impact of this reduction stems from the fact that non-defense federal spending is now growing at a rate that far outstrips any plausible reductions in defense spending. In fact, were the Defense budget to be eliminated altogether, the savings would pay for only about eight years of growth in the non-defense federal budget.
Defense: A Bear Market? [1]
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good health is evident to many investors. The industry sells at a roughly 30% discount to the Standard & Poor’s average, and the discount was closer to 80% until a couple of mergers raised hopes that part of the industry might emerge in a viable condition. The combined market value of the top four aerospace firms is less than that of McDonald’s. (See Figure 2.) This means that Big Macs and Egg McMuffins are judged by the investing public to have greater immediate reward than stealthy submarines, advanced surface combatants, and sea-launched cruise missiles. In one sense, this may be good news— but if it is based on wishful thinking about the threats the nation faces, it would be very bad news indeed.
Of even more concern is the fact that as the defense industrial base shrinks, our armed forces are being called upon for missions around the world at a rate seldom, if ever, matched in peacetime. The National Security Revitalization Act recently passed by the House of Representatives contains the following statement:
Despite severe reductions and shortfalls in defense funding and force structure, since 1993 United States military forces have been deployed more often and committed to more peacetime missions per year than ever before. ... At the end of FY94, over 70,000 U.S. personnel were serving in such regions as Iraq, Bosnia, Macedonia, the Adriatic Sea, Rwanda, and the Caribbean Sea for missions involving Haiti and Cuba.
Peacetime Casualties
Another factor that weighs heavily on the nation’s military effectiveness is the extraordinary loss of dedicated, highly skilled workers who helped make our defense industrial base the standard of the world. Of the 3.5 million of our fellow citizens who until recently worked in the defense industry, about one-half are now in the process of losing their jobs. This already has produced about one million individual and highly personal tragedies in terms of disruptions of lives. Our industry currently is shedding one employee every 30 seconds.
The question this raises is whether we should continue defense spending to preserve employment. My answer to that is a steadfast “no.” The only justification—the only self-sufficient justification—for defense spending is to underpin whatever the nation’s defense needs may be. That is a very good reason, but I also believe it is the only reason.
Maintaining Critical Mass
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systems currently being built in the manufacturing facilities of the U.S. defense industrial base. However, I fear the call for preservation of such “critical masses” sometimes is being used as an excuse to avoid getting on with the restructuring of the defense industry that becomes more and more pressing with each passing day. To extend the argument: Soon, the shoemakers may argue that the military must stockpile shoes because, obviously, a military force cannot fight without shoes.
The aerospace segment of the U.S. defense industry is at this moment operating with about two-thirds more capacity than it needs—and that is before cuts that already have been imposed have translated themselves into outlay reductions. The industry is rapidly propelling itself to the point where it will be comprised of headquarters without factories and executives without workers. This is why the Department of Defense has made it clear, at the highest levels, that it expects our industry to consolidate for efficiency.
There are examples of such overcapacity throughout the defense industry. At the moment, there are seven manufacturers of military aircraft, both fixed- and rotary-wing, left in the United States. The Department of Defense has indicated that it is going to purchase only about 100 aircraft per year for the foreseeable future. That means about 15 airplanes per manufacturer per year. If this trend continues, we will wind up with a large number of companies operating half-full plants—or worse.
A far better approach is to combine companies with partly filled plants, get rid of unneeded facilities, and operate the remaining ones at full efficiency. I would further argue that our government is much better served by having three or even two healthy, strong, efficient competitors than by hanging on to a half-dozen of them for the sake of theoretical competition. Unfortunately, in some areas such as submarines and main battle tanks, it is entirely likely that we can afford only one supplier—if that.
This is the new math of defense consolidation: When addressing costs, combining two companies requires that one plus one must equal no more than one and a half. When it comes to market opportunities for such newly combined companies, one plus one must equal three. That is, synergy must be obtainable and we must shrink while we grow—a consolidation course Martin Marietta
decided on several years ago. After our merger with General Electric Aerospace, we announced the closing of five million square feet of plants in ten states. As a direct result of these closings, we have begun generating net savings of more than $1.5 billion in the next five years—most of which will go to the taxpayers. We have experienced savings on a somewhat smaller, yet still very significant scale from our purchase of General Dynamics’s Space Systems Division, and we expect even greater savings from our recent combination with Lockheed. Other companies have been pursuing this same course with corresponding benefits.
This is all very painful to achieve—but very necessary if the United States is not to be left with an imperiled defense industrial base. As one pundit once observed, “Change is just about the worst experience people ever have. At the same time, progress is impossible without change.”
Significant Trends
It is important to highlight the trends that will determine the future of the U.S. defense industry:
► The United States’ manufacturing base is threatened. Much has been made in recent years of the shift to a service, rather than manufacturing, economy. Economic growth obviously is to be encouraged, but we must not ignore the demands that a global economy imposes on a high-cost manufacturing sector, such as exists in the United States. We have been losing highly skilled workers and precision manufacturing facilities to lower-priced, less-regulated competitors throughout the world. One indication of the problem is that a few years ago, for the first time, the number of government employees in the United States exceeded the number of workers in the manufacturing sector. A country may be able to build an economy based on a service industry—but it cannot win a war with a service economy.
y Consolidation will increase dramatically. The only way for the country to have a defense industrial base that is capable of providing superior weapon systems under today’s difficult economic climate is to have fewer, stronger, more efficient companies.
>■ Technology will continue to be seen as the “magic bullet” to minimize friendly casualties. We saw in the Gulf War the consequences of modern military technology— surface- and submarine-launched cruise missiles, precision-guided weapons, stealth, and the ability to see at night and to navigate at sea within a few meters. The result was a quick, decisive victory with relatively few casualties.
But we are in danger of losing our technological edge. Because of the drastic reduction in funding both in procurement and to a lesser extent in research and development, we risk atrophying, over a very few years, the defense industrial base that took decades to build. What is so often overlooked is the fact that in today’s era of “come as you are” wars, where outcomes can be decided in a matter of days, the only equipment available to our troops will be that which was planned for and acquired during the decades before. The systems that performed so well in the Persian Gulf largely represented the technology of the 1960s, the development of the 1970s, and the production of the 1980s—all used by the people of the 1990s. > There will be renewed emphasis on modernization. The United States has espoused a strategy of minimizing casualties, as well as offsetting a smaller force, by fielding the most modern military equipment. In actuality, our military hardware is now on a replacement cycle of about 54 years—this in a world where technology typically has a half-life from two to ten years. This situation is unsustainable over the long term.
Whatever might be our objective for national security, I believe that it is critical that we have a balanced force— by which I mean a force balanced in terms of three key parameters. The first of these is the size of the force—including enough carrier battle groups, amphibious expeditionary groups, tactical fighter wings, and infantry divisions to carry out whatever mission is assigned. The second is the level of readiness—that is, its preparedness to fight and sustain operations. There is no benefit in having a large force that is not properly trained or maintained or logistically supported. Finally, there is the matter of modernization—equipping the force with the most capable weapons available. Modernization is a key factor in minimizing casualties in combat. It is also the underpinning of the defense industrial base, because it is on modernization that the defense procurement budget is largely expended.
Further, all this must be balanced against our national security objectives: to have a mismatch of our military objectives and our military capabilities would represent the most undesirable circumstance of all.
We as a nation can set forth a variety of alternative defense strategies that might require small, medium, or large defense industrial bases to underpin them. This is a policy decision to be made on the basis of the national objectives we wish to set, the degree of risk we are willing to assume in pursuing them, and the resources we can afford to devote to them.
The United States is the only surviving “full-service” superpower, but the future is still extraordinarily difficult to predict. As Donald Kagan observes in his new book, On the Origins of War, peace does not preserve itself. Just as our Navy must be prepared for any reasonable contingency, the defense industrial base must be prepared to respond to the needs of our military. In short, as Theodore Roosevelt observed in an 1897 speech at the Naval War College, "Peace is a goddess only when she comes with sword girt on thigh.”
Mr. Augustine was chairman and chief executive officer of Martin Marietta prior to assuming his current responsibilities as president of the new Lockheed Martin Corporation.
[1] often ask those in commercial businesses to imagine what it would be like to have their market decline by 68% in real terms in less than a decade. It is a very wrenching experience, comparable in its impact on the defense industry to the effect of the great stock market crash of 1929 on the U.S. economy as a whole—when some 46% of its volume disappeared in the five years that followed. Even more pronounced than the 1929 market crash, the defense industry “crash” of the last several years continues to plummet downward.
The fact that the U.S. defense industrial base is not in
[2] do not pretend to be an expert on the shipbuilding portion of the industrial base, but I did take note of the points contained in a presidential statement in late 1993 accom
panying the National Defense Authorization Act for Fiscal Year 1993, which said in part, “The surge in government orders for naval vessels . . . between 1981 and 1990 averaged 17-18 ships per year,” which helped make up for a sharp fall-off in commercial vessel orders. The statement goes on to note that “the defense program for FY
1995-1999 . . . projects that DoD will order on average 8 new ships a year (including sealift ships) in those years.”
The shipyards, in other words, face many of the same difficult challenges as the rest of the defense industrial base—an ironic commentary on an industry that during World War II produced hundreds of Liberty ships, setting a record of building one such ship, from laying the keel to sliding down the ways, in just over four days.
There are specialized shipbuilding skills, especially as they relate to nuclear submarines, that are truly critical to our nation’s long-term national security posture and that have no counterpart in the commercial marketplace. This is one of the few cases—one of the very few cases—where we need to take extraordinary steps to ensure that these skills are not dissipated and lost. I support the decision of Defense Secretary William Perry to go ahead with the construction of nuclear submarines, keeping the production line running to sustain this vital industrial base.
In short, there are compelling cases for specific weapon