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The U.S. Defense Industrial Base: Background and Issues for Congress
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The U.S. Defense Industrial Base: Background
October 12, 2023
and Issues for Congress
Luke A. Nicastro
The U.S. defense industrial base (DIB) is the network of people, organizations, facilities, and
Analyst in U.S. Defense
resources that provides the U.S. government—particularly the Department of Defense (DOD)—
Infrastructure Policy
with defense-related materials, products, and services.
The DIB encompasses a wide variety of entities, including commercial firms operated on a for-
profit basis, not-for-profit research centers and university laboratories, and government-owned industrial facilities. It provides everything from large, technologically sophisticated weapons platforms (e.g., nuclear submarines) and highly specialized operational support (e.g., intelligence analysis) to general commercial products (e.g., laptop computers) and routine services (e.g., information technology support). By supplying and equipping the armed services, the DIB enables the United States to execute national strategy and develop, maintain, and project military power.
Since World War II, the U.S. government has devoted considerable resources and attention to ensuring the DIB can meet the requirements of national defense. Within DOD and the executive branch, a diverse array of organizations and programs exist to monitor, protect, and strengthen the industrial base. Congress appropriates hundreds of billions of dollars annually to acquire materials, products, and services from DIB suppliers, and has established and funded a number of programs intended to assess or modify aspects of the DIB as a whole. Congress also routinely oversees the executive branch exercise of industrial base-related functions.
In conducting its role in resourcing, overseeing, and legislating for the U.S. defense industrial base, Congress may consider a number of questions, including:
• Do suppliers have adequate capacity to meet U.S. defense needs? • What is the appropriate degree of regulation for the commercial defense industry? • How resilient should defense supply chains be? What role should sourcing, content, and production
requirements play in government stewardship of the industrial base?
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Contents
Background ..................................................................................................................................... 1
Defining the U.S. Defense Industrial Base ............................................................................... 1
Historical Development of the DIB .......................................................................................... 2
Early Origins through the Cold War ................................................................................... 2
1991 to Today ..................................................................................................................... 5
Overview of the Contemporary DIB ......................................................................................... 6
Commercial Sector.............................................................................................................. 6
Nonprofit and Public Sector............................................................................................... 11
Government Stewardship of the DIB ...................................................................................... 17
The Role of the Executive ................................................................................................. 17
The Role of Congress........................................................................................................ 21
Issues for Congress ........................................................................................................................ 23
‘Right-Sizing’ the Industrial Base ........................................................................................... 23
Assessing and Managing Capacity ................................................................................... 23
The DIB and Great Power Competition ............................................................................ 24
An Arsenal of Democracy? ............................................................................................... 26
Regulating Private Industry ..................................................................................................... 27
Competition and Consolidation ........................................................................................ 27
Business Practices and the Role of Government .............................................................. 31
Supply Chains and Sourcing Requirements ............................................................................ 33
Supply Chain Resilience ................................................................................................... 33
Onshoring and ‘Friendshoring’ ......................................................................................... 34
Domestic Content Requirements and Restrictions ............................................................ 35
Figures
Figure 1. U.S. Defense Outlays, FY1940-FY2028 (Projected) ....................................................... 3
Figure 2. U.S. Defense Production, 1947-2023 ............................................................................... 4
Figure 3. DOD Contract Spending by State, FY2022 ..................................................................... 8
Figure 4. DOD Major Range and Test Facility Base ..................................................................... 14
Figure 5. Ammunition Facilities .................................................................................................... 15
Figure 6. Covered Depots .............................................................................................................. 16
Figure 7. ASD (IBP) Organizational Chart ................................................................................... 19
Figure 8. Consolidation in the Defense Industry ........................................................................... 29
Tables
Table 1. Five Largest U.S. Defense Contractors ............................................................................. 9
Table 2. DOD-sponsored FFRDCs ................................................................................................. 11
Table 3. DOD UARCs ................................................................................................................... 12
Table 4. DOD Science and Technology Reinvention Laboratories ............................................... 13
Table 5. Supply Chain Enablers and Recommendations ............................................................... 33
Table 6. Selected DIB Sourcing Requirements and Restrictions .................................................. 36
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Contacts
Author Information ........................................................................................................................ 37
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The U.S. Defense Industrial Base: Background and Issues for Congress
Background
Defining the U.S. Defense Industrial Base
The term defense industrial base appears to have entered common parlance during the Korean War.1 Usage may vary slightly by context, but today Congress, the executive branch, think tanks, and media outlets frequently employ the term to refer to the organizations, facilities, and resources that supply the U.S. government—principally, but not exclusively, the Department of Defense (DOD)—with materials, products, and services for defense purposes.2 Government acquisition from DIB entities is mainly managed through the use of contracts.3
As typically used, the DIB includes public and private owners and operators of relevant productive capacity, to include some organizations that may not exclusively or predominantly produce specialized defense equipment.4 When referring to private industry, the term encompasses both those suppliers with a direct contractual relationship with the government (referred to as prime contractors) and those that provide prime contractors with the goods and services necessary to perform defense contracts (known as subcontractors).5
Definitions of the DIB and related concepts often have a geographic component, especially when described in statute. The Defense Production Act of 1950 (DPA), for instance, defines the domestic industrial base as consisting of “domestic sources which are providing, or which would be reasonably expected to provide, materials or services to meet national defense requirements during peacetime, national emergency, or war.”6 For the purposes of the DPA, these domestic
sources are further defined as businesses that perform contracted activities at, and source contracted components and assemblies from, locations inside the United States or Canada.7
Similarly, 10 U.S.C. §4801 defines the national technology and industrial base (NTIB) as “the persons and organizations that are engaged in research, development, production, integration,
1 The earliest use of the full phrase that CRS was able to identify was in an Associated Press article syndicated in May 1953. The article referred to industry as a ‘base’ upon which military power was built, detailing a debate between former Truman Administration officials—who had favored a ‘broad’ base—and Eisenhower Administration officials—some of whom favored a ‘narrower’ base. “House Group Opens Hearing on Weakened Controls Bill,” The Washington
Post, May 22, 1953, available online via ProQuest at https://www.proquest.com/docview/152546852; for a contemporaneous account of the ‘broad’ vs. ‘narrow’ debate, see Austin Stevens, “Pentagon Aroused by Plan to Narrow ‘Defense Base,’” The New York Times, April 9, 1953, available online at https://timesmachine.nytimes.com/timesmachine/1953/04/09/83838073.html?pageNumber=13.
2 Terms other than the defense industrial base have also been used by policymakers, analysts, and other participants in defense policy discourse to express similar meanings (examples include the national technology and industrial base, the national security industrial base, and the military-industrial complex). For consistency, this report uses defense
industrial base (abbreviated DIB or industrial base) throughout. The DIB also supports other federal agencies that exercise defense-related functions (for example, the Coast Guard and the Central Intelligence Agency). For the purposes of this report, consideration of the DIB will mainly concern its role in supporting DOD.
3 For a general overview of defense contracting, see CRS Report R44010, Defense Acquisitions: How and Where DOD
Spends Its Contracting Dollars.
4 The DOD Dictionary of Military and Associated Terms, for instance, defines the DIB as “the Department of Defense, government, and private sector worldwide industrial complex with capabilities to perform research and development and design, produce, and maintain military weapon systems, subsystems, components, or parts to meet military requirements.” Department of Defense, DOD Dictionary of Military and Associated Terms, February 2023, p. 55.
5 See 41 U.S.C. §8701 for statutory definitions of prime contract, prime contractor, subcontract, and subcontractor. 6 50 U.S.C. §4552(7). 7 50 U.S.C. §4552(8).
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services, or information technology activities conducted within the United States, the United Kingdom of Great Britain and Northern Ireland, Australia, New Zealand, and Canada.”8
Policymakers and analysts often divide the defense industrial base by key products. Thus, those organizations and facilities that build submarines may be referred to as the “submarine industrial base,” those that manufacture helicopters may constitute the “rotary-wing aircraft industrial base,” and so on.9
Historical Development of the DIB
Early Origins through the Cold War
Since the Revolutionary War, the United States has relied on a variety of organizations and facilities to supply and equip its military forces. However, for the first 150 years of its existence, the federal government devoted few resources to the management and maintenance of a permanent defense industrial base.10 Although the Army and Navy operated several government arsenals and shipyards, these had limited production capacity, and in times of conflict the armed services depended heavily on private contractors.11 The rapid arms buildups that accompanied the wars of this period were followed by corresponding capacity reductions, with the vast majority of wartime contractors returning their focus to the commercial market when hostilities ended.12 As the logistical and technological complexity of conflict grew, the U.S. government made larger efforts to manage these aspects of warfighting—industrial mobilization during World War I, for instance, was coordinated by several government bodies—but it wasn’t until World War II that the foundations of the modern DIB were laid.13
America’s entry into World War II sparked an industrial mobilization effort of unprecedented scale. The production of materiel ranging from basic commodities (like steel and rubber) to specialized weapons systems (such as planes and tanks) expanded, and the U.S. DIB ultimately supplied over two-thirds of Allied equipment.14 This expansion created the present structure of the DIB: the federal government worked with private firms to convert, expand, or construct thousands of facilities for defense production, and also built smaller numbers of government-
8 For more on the national technology and industrial base, refer to the “Government Management of the DIB” section of this report. See also CRS In Focus IF11311, Defense Primer: The National Technology and Industrial Base.
9 For respective examples of these usages, see Team Submarines Public Affairs, “U.S. Navy Submarine Industrial Base Celebrates Growing Workforce,” U.S. Navy, June 29, 2023, https://www.navsea.navy.mil/Media/News/Article-View/Article/3444392/us-navy-submarine-industrial-base-celebrates-growing-workforce/; and Section 163 of the FY2023 National Defense Authorization Act (P.L. 117-263).
10 For an overview of U.S. defense production in the 18th and 19th centuries, see Merritt Roe Smith, “Military Arsenals and Industry Before World War I,” in War, Business, and American Society, ed. Benjamin Franklin Cooling (New York: Kennikat Press, 1977), pp. 24-42.
11 Ibid. 12 Of the 48 major U.S. arms contractors active during the Civil War, for instance, 37 had exited the sector by 1870, while 17 of the 19 U.S. plants built to manufacture artillery during World War I had closed by 1920. Ibid., p. 36, and Benedict Crowell and Robert Wilson, Demobilization: Our Industrial and Military Demobilization after the Armistice,
1918-1920 (New Haven: Yale University Press, 1921), p. 167.
13 For an overview of the War Industries Board—the most important of these bodies—see Randall Kester, “The War Industries Board 1917-1918: A Study in Industrial Mobilization,” The American Political Science Review, vol. 34, no. 4 (August 1940), pp. 655-684. Available online at https://www.jstor.org/stable/1947819.
14 This included 86,000 tanks, 2.5 million trucks, 286,000 aircraft, 434 million tons of steel, and 41 billion rounds of ammunition. Arthur Herman, Freedom’s Forge: How American Business Produced Victory in World War II (New York: Random House, 2012), p. ix.
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owned plants to manufacture certain items considered difficult or unsuitable for private industry to make (e.g., high explosives).15
Although some economic demobilization occurred after 1945, the wartime industrial base was not entirely dismantled, and by the late 1940s the onset of the Cold War led to renewed investments in military capabilities (see Figure 1).16 From 1948 to 1963, annual spending on defense increased by an average of 8.4%, with annual outlays for research, development, test, and evaluation (RDT&E) and procurement each growing by an average of 19.7%.17 The Korean War provided another major impetus to industry, raising demand for defense equipment and leading Congress to pass the Defense Production Act (DPA).18
Figure 1. U.S. Defense Outlays, FY1940-FY2028 (Projected)
Source: Figure created by CRS using data from OMB Budget of the United States Government, Fiscal Year 2024, Historical Tables, Table 3.1 and Table 10.1, March 2023; and CBO, Budget and Economic Data, Spending Projections, by Budget Account, February 2023. Notes: Figure originally developed for CRS Report R47582, FY2024 Defense Budget Request: Context and Selected
Issues for Congress, by Cameron M. Keys and Brendan W. McGarry.
As a result, the early decades of the Cold War were a dynamic period for the DIB, characterized by rising production output (see Figure 2).19 Commercial firms played a critical role in this expansion, developing and producing the sophisticated technologies and weapons systems on which U.S. military power increasingly depended (although DOD continued to use government-
15 As a 1944 congressional study put it: “Prior to 1939, there were practically no powder-explosives, shell-loading, and bag-loading plants in America compared with our tremendous future requirements. Private industry could not expand to meet this tremendous need … the War Department had to build plants.” Rep. Albert Engel, “Ordnance Ammunition Production,” Army Ordnance Report, no. 6 (August 1944), p. 4. Available at https://www.jstor.org/stable/45367625. 16 For an influential articulation of the strategic rationale informing these spending patterns, see National Security Council, “A Report to the National Security Council - NSC 68,” April 12, 1950, pp. 64-65. Available online via the Harry S. Truman Presidential Library and Museum at https://www.trumanlibrary.gov/library/research-files/report-national-security-council-nsc-68.
17 CRS analysis of the “percent real growth” figures for DOD outlays between FY1948 and FY1963. See Office of the Under Secretary of Defense (Comptroller), “National Defense Budget Estimates for FY2024,” DOD, May 2023, pp. 162-163. Available at https://comptroller.defense.gov/portals/45/documents/defbudget/fy2024/fy24_green_book.pdf.
18 For more information on the DPA, refer to the “Government Management of the DIB” section of this report; see also CRS Report R43767, The Defense Production Act of 1950: History, Authorities, and Considerations for Congress.
19 See Figure 2 for historical production output figures.
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owned production facilities, their relative importance declined).20 The growing economic and military importance of such firms led some policymakers to express concerns about their political influence. President Dwight D. Eisenhower, for instance, observed in a 1961 address that the “conjunction of an immense military establishment and a large arms industry is new in the American experience” and cautioned against “the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.”21
Figure 2. U.S. Defense Production, 1947-2023
Monthly output of defense and space equipment from Jan. 1947 to Jun. 2023.
Source: CRS graphic based on data from the Board of Governors of the Federal Reserve System, “Industrial Production: Equipment: Defense and Space Equipment,” at https://fred.stlouisfed.org/series/IPB52300S. Notes: The Y-axis shows the Federal Reserve’s industrial production (IP) index, which measures the monthly output of U.S. based production facilities and expresses that value as a percentage of the average monthly real output for a base year (currently 2017). Thus, if the output for a particular month were to be given as “80,” that would indicate the value production was 80% of the 2017 average. For more information, refer to Board of Governors of the Federal Reserve System, “Industrial Production and Capacity Utilization,” at https://www.federalreserve.gov/releases/g17/About.htm.
Following lower output during the 1970s, the DIB experienced strong growth during the 1980s, concurrent with the military buildup pursued by the Reagan Administration. According to one
20 By the end of the 1950s, government-operated facilities produced less than 10% of U.S. defense equipment. Merton Peck and Frederic Sherer, The Weapons Acquisition Process: An Economic Analysis (Boston: Harvard University, 1962), p. 98. The early Cold War period also saw the establishment of the first federally funded research and development centers (FFRDCs) and a number of government-owned RDT&E facilities such as DOD and Department of Energy laboratories (refer to the “Nonprofit and Public Sector” section of this report for more information).
21 For more on the genesis and impact of Eisenhower’s speech, see James Ledbetter, Unwarranted Influence: Dwight
D. Eisenhower and the Military-Industrial Complex (New York: Yale University Press, 2011).
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study, defense-related private employment increased from approximately 1.9 million workers in 1977 to 3.2 million in 1985, and defense-related production rose across dozens of industrial subsectors.22 At the same time, shifting macroeconomic conditions during this period also led to output declines for several defense-relevant subsectors, including shipbuilding and explosives.23
1991 to Today
With the end of the Cold War, the United States government assessed that its military requirements had diminished and began to reduce defense spending. Because many firms in the commercial DIB were heavily reliant on the defense market, DOD determined that the sector’s continued viability depended on restructuring. Accordingly, the U.S. government actively encouraged companies to pursue consolidation, with the result that by the early 2000s the number of prime contractors had diminished from 51 to 5.24 Over the course of the 1990s, the production output of the commercial DIB decreased by approximately 35%.25 The changing defense environment also affected government-owned capabilities: DOD declared numerous facilities excess and closed them, while also reducing employment and activity at remaining sites.26
Defense production rose again in the 2000s with the commencement of the Global War on Terror. Compared with the production of equipment, the importance of operational support—the use of contractor personnel to support military operations—to the business model of many defense firms grew during this period.27 In the early 2010s, defense outlays decreased in response to several developments (including the Budget Control Act of 2011 and U.S. drawdowns in Iraq and Afghanistan) that correlated with reduced defense industrial output.28
As the United States’ strategic focus shifted from counter-terrorism to great power competition during the 2010s and early 2020s, industrial base matters began to feature more prominently in defense policy discussions. Geopolitical developments such as intensifying U.S. competition with China and Russia’s 2022 invasion of Ukraine generated concern among policymakers about the health of the DIB, and led to increases in relevant appropriations as well as other executive and legislative actions.29 In terms of monthly output, production began to expand steadily in the late
22 David K. Henry and Richard P. Oliver, “The Defense Buildup, 1977-85: Effects on Production and Employment,” Monthly Labor Review (U.S. Bureau of Labor Statistics), August 1987, pp. 6-8. For another estimate that cites a total DIB workforce of 1.7 million in 1976 and 3.3 million in 1986, see Eugene Gholz and Harvey Sapolsky, “Restructuring the U.S. Defense Industry,” International Security vol. 24 no. 3 (Winter 1999-2000), p. 9. 23 Ibid., p. 6. This decline in output may have had capacity implications: over the course of the 1980s, for example, three major private shipyards closed. See Gholz and Sapolsky, “Restructuring the U.S. Defense Industry,” p. 19. 24 The remaining 5 are Lockheed Martin, Boeing, RTX (formerly Raytheon), Northrop Grumman, and General Dynamics. DOD, “State of Competition within the Defense Industrial Base,” February 2022, p. 1. Available at https://media.defense.gov/2022/feb/15/2002939087/-1/-1/1/state-of-competition-within-the-defense-industrial-base.pdf.
25 In January 1990, monthly defense and space related output was measured at 107.99 on the IP index, while in December 1999 it was 70.3. Federal Reserve, “Industrial Production,” at https://fred.stlouisfed.org/series/IPB52300S. 26 This was particularly true for Army industrial facilities. See W. Michael Hix et al., Options for Managing the Army’s
Arsenals and Ammunition Plants, (RAND Corporation: Santa Monica, 2003) and U.S. Army, “Ammunition Production During the Cold War,” April 2009, https://aec.army.mil/application/files/1614/9505/0982/ammo-storage02.pdf.
27 DOD reliance on contractor personnel, particularly in Iraq and Afghanistan, at times drew considerable interest and controversy. See CRS Report R43074, Department of Defense’s Use of Contractors to Support Military Operations:
Background, Analysis, and Issues for Congress.
28 For more information on the budget enforcement mechanisms enacted as part of the Budget Control Act, see CRS Report R44874, The Budget Control Act: Frequently Asked Questions.
29 These included: the creation of new government organizations; invocations of the DPA; and authorizations of multi-year procurement. Refer to the “Government Stewardship of the DIB” section of this report for more information.
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2010s, rising (after a sharp but brief dip during the COVID-19 pandemic) to a record high in June 2023.30
Overview of the Contemporary DIB
The contemporary DIB encompasses a large number of organizations and facilities supporting a diverse array of military requirements. DIB-related sites are spread across the United States and range from sprawling corporate ‘campuses’ with multiple production lines to research laboratories and office buildings.
There are many ways to conceptually divide the DIB—by platform supported (e.g., submarines, combat aircraft), by public law title supported (i.e., RDT&E, Procurement, Operation and Maintenance, Military Personnel, or Military Construction), by production function (testing, final assembly, etc.), by the value or workforce size of constituent entities, or by ownership model (i.e., government-owned, government-operated; government-owned, contractor-operated; or contractor-owned, contractor-operated). This report divides the DIB into two broad sectors: the commercial sector, in which the chief actors are private firms operated on a for-profit basis, and the nonprofit and public sector, in which the chief actors are government bodies and academic or scientific institutions operated on a not-for-profit basis.
Commercial Sector
Compared to other parts of the U.S. economy, the commercial defense industry is unique in several important ways. The federal government is effectively the only buyer for many defense contractors’ products and services, leading some experts to characterize the industry as a monopsony market environment.31 The commercial DIB is also highly regulated, with many of its products and services subject to restrictions on both domestic possession or usage and international import or export.32 In addition, defense contractors are required to comply with an array of government requirements intended to protect sensitive information and systems.33 Because of the sector’s unusually direct reliance on government spending, some contractors fund
30 Refer to Federal Reserve data presented in Figure 2. See also Matthew Boesler and Roxana Tiron, “U.S. Industrial Production of Defense Equipment Hits Record High,” Bloomberg Government, July 18, 2023, https://www.bgov.com/next/news/rxzutkdwrgg0. Note that Federal Reserve IP data begins in 1947 and thus does not include World War II.
31 See, for instance, R. Carril and M. Duggan, “The Impact of Industry Consolidation on Government Procurement,” National Bureau of Economic Research, October 2018, p. 28. Available online at https://www.nber.org/system/files/working_papers/w25160/w25160.pdf. This designation applies mainly to firms that mainly or exclusively provide specialized defense equipment (e.g., the ‘Big Five’), rather than suppliers of products and services with market demand beyond the defense sector.
32 See, for instance, 27 C.F.R. Part 479. 33 This may include obtaining and maintaining security clearances for contractor employees, constructing and maintaining secure facilities, etc. According to the Defense Counterintelligence and Security Agency (DCSA), there are approximately 12,500 contractor facilities cleared to handle classified information. See DOD, “National Industrial Security Program,” DCSA, https://www.dcsa.mil/Industrial-Security/National-Industrial-Security-Program-Oversight/.
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lobbying activities.34 Additionally, commercial defense firms employ tens of thousands of former DOD personnel, both military and civilian.35
The commercial sector constitutes the largest element of the DIB, both in terms of resources, facilities, and personnel employed as well as the value of the products and services provided to the U.S. government. According to a 2023 report by the National Defense Industrial Association (a defense industry trade association), the defense industry employed 1.1 million U.S. workers and encompassed 59,678 companies as of 2021.36 In FY2022, DOD spending on contracts with DIB suppliers in the 50 states and the District of Columbia totaled $390.5 billion, or approximately 1.53% of the total U.S. gross domestic product (GDP) for calendar year 2022.37 As Figure 4 shows, this spending was distributed across the country, with contractors located in Texas, Virginia, California, New York, Florida, and Connecticut receiving the largest amounts.38
34 In 2022, for instance, the nonprofit group OpenSecrets claimed that defense contractors spent over $100 million on lobbying activities. Taylor Giorno and Filip Timotija, “Defense Sector Spent $101 Million on Lobbying During the First Three Quarters of 2022,” OpenSecrets, November 3, 2022, https://www.opensecrets.org/news/2022/11/defense-sector-spent-101-million-lobbying-during-first-three-quarters-of-2022/. To characterize the relationship between defense contractors and government more broadly, analysts have described the commercial DIB as part of an iron
triangle—that is, “a political relationship that brings together three key participants in a clearly delineated area of policy-making”—comprised of private industry, DOD, and Congress. See Gordon Adams, The Politics of Defense
Contracting: The Iron Triangle (New York: Council on Economic Priorities, 1981).
35 In 2019, the Government Accountability Office found that over 37,000 former DOD personnel were employed at 14 defense contractors whose employment figures the organization reviewed. “Post-Government Employment Restrictions,” GAO, September 2021, https://www.gao.gov/assets/gao-21-104311.pdf. 36 Jennifer Stewart et al., “Vital Signs 2023: Posturing the U.S. Defense Industrial Base,” National Defense Industry Association, February 2023, https://www.ndia.org/policy/publications/vital-signs.
37 Defense Spending by State—Fiscal Year 2022, DOD Office of Local Defense Community Cooperation, September 2023, p. 16. Available at https://oldcc.gov/dsbs-fy2022. GDP figure of $25.46 trillion provided by the Bureau of Economic Analysis, https://www.bea.gov/news/2023/gross-domestic-product-fourth-quarter-and-year-2022-third-estimate-gdp-industry-and#:~:text=Imports%20increased%20(table%202).,(tables%201%20and%203).
38 Virginia, California, Texas, and Florida regularly feature among the top five recipients of DOD contract obligations. New York’s high ranking in FY2022 was likely the result of unique spending patterns attributable to the federal response to COVID-19—$16.7 billion of the $24.5 billion in FY2022 contract spending was awarded to Pfizer, and the state did not feature among the top ten recipients of DOD contract obligations in any of the three fiscal years preceding the COVID-19 pandemic. See OLDCC, Defense Spending by State – FY2022, p. 82.
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Figure 3. DOD Contract Spending by State, FY2022
Source: CRS graphic based on DOD contract spending data provided in Defense Spending by State—Fiscal Year
2022, DOD Office of Local Defense Community Cooperation, September 2023. Available online at https://oldcc.gov/dsbs-fy2022.
Sorted by municipality, the top 5 locations for DOD contract spending in FY2022 were:
1. Tarrant, Texas ($18.6 billion);
2. Fairfax, Virginia ($17.8 billion);
3. New York, New York ($17.2 billion);39
4. San Diego, California ($11.9 billion), and;
5. Dallas, Texas ($10.5 billion).
In FY2022, the top five sectors of industrial activity (defined according to the North American Industry Classification System, or NAICS) by their share of the total value of DOD contracting actions were:40
1. Manufacturing of metals, machinery, computer, electronics, and related items
(37.94%);
2. Professional, scientific, and technical services (23.90%);
3. Manufacturing of paper, petroleum, coal, chemicals, plastics, rubber, and
nonmetallic minerals (11.96%);
4. Construction (7.43%); and
39 See preceding footnote. 40 For more information on each NAICS category, see U.S. Census Bureau, “North American Industry Classification System,” 2023, https://www.census.gov/naics/?99967.
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5. Administrative, Support, and Waste Management and Remediation Services
(4.31%).41
The ‘Big Five’
Considered in terms of both total market capitalization and annual DOD contract spending, the commercial sector is dominated by five large, publicly traded U.S. firms, sometimes referred to as the ‘Big Five’ (see Table 1 below).
Table 1. Five Largest U.S. Defense Contractors
Location of
FY2022 DOD
Total Market
Company
Corporate HQ
Contract Obligations
Capitalizationa
Employees
Lockheed Martin (LMT)
Bethesda, MD
$44.5 bil ion
$102.94 bil ion
116,000
RTX (RTX)
Arlington, VA
$25.4 bil ion
$105.18 bil ion
182,000
General Dynamics (GD)
Reston, VA
$21.5 bil ion
$59.57 bil ion
106,500
Boeing Co (BA)
Arlington, VA
$14.2 bil ion
$118.01 bil ion
156,000
Northrop Grumman (NOC) Falls Church, VA
$12.8 bil ion
$64.54 bil ion
95,000
Source: Annual DOD contract obligation figures are from OLDCC, Defense Spending by State—FY2022. Market capitalization and employee figures are from The Wall Street Journal, “Market Data” (https://www.wsj.com/market-data/quotes/company-list; information current as of September 27, 2023). Notes: Each firm’s New York Stock Exchange ticker symbol is in parentheses. a. As of September 27, 2023. Market capitalization refers to the total value of a publicly traded company’s
outstanding shares of stock and may vary considerably over time.
Over the past four fiscal years, these five firms have tended to receive about one-third of all annual DOD contract obligations in the United States (the group received approximately 30.3% of FY2022 obligations, 29.1% of FY2021 obligations, 34.6% of FY2020 obligations, and 31% of FY2019 obligations).42 Of the 78 major weapons systems DOD identified in its FY2024 budget materials, 58—over 74% of the total—feature at least one of the ‘Big Five’ as a prime contractor.43 All five of these companies have been major recipients of defense contracts since at least the 1950s.44 In addition to supplying the U.S. government with defense articles and services, these companies also supply foreign governments through Foreign Military Sales (FMS) and Direct Commercial Sales (DCS).45
41 CRS analysis of FY2022 contract action data retrieved from the Federal Procurement Data System. This figure also includes contracting actions involving university-affiliated research centers (described in the “Nonprofit and Public
Sector” section of this report).
42 CRS analysis of obligation information provided in OLDCC’s FY2022, FY2021, FY2020, and FY2019 “Defense Spending by State” reports. Available at https://oldcc.gov/sites/default/files/defense-spending-rpts/oldcc_dsbs_fy2021_final_web_revised.pdf (FY2021); https://oldcc.gov/sites/default/files/op-034-oldcc_dsbs_fy2020-sm1.1_chax_r2.pdf (FY2020); and https://oldcc.gov/sites/default/files/defense-spending-rpts/oldcc_dsbs_fy2019_final_web.pdf (FY2019).
43 CRS analysis of information provided in DOD, “FY2024 Program Acquisition Costs by Weapon System,” March 2023, https://comptroller.defense.gov/Portals/45/Documents/defbudget/FY2024/FY2024_Weapons.pdf.
44 For example, all five firms (or their predecessors) were in the top 25 defense contractors by DOD obligations for the period FY1958-1960. Peck and Scherer, The Weapons Acquisition Process, p. 613.
45 The FMS process is managed by the U.S. government, whereas DCS allows U.S. companies to sell articles and services directly to foreign customers. For more information, see CRS Report R46337, Transfer of Defense Articles:
U.S. Sale and Export of U.S.-Made Arms to Foreign Entities.
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Considered in an international context, these five firms also occupy dominant positions. In a 2023 Defense News ranking of global defense companies by annual revenues, Lockheed Martin, RTX, Northrop Grumman, Boeing, and General Dynamics ranked first, second, third, fifth, and sixth, respectively.46 Other firms in the global top 10 were the Aviation Industry Corporation of China (#4), BAE Systems (#7), China North Industries Group Corporation Limited (#8), L3Harris Technologies (#9), and the China South Industries Group Corporation (#10).47
Other Large Firms
In addition to the ‘Big Five,’ the DIB includes numerous other large U.S. commercial firms.48 These include industrial concerns specializing in the production of specific systems (such as the shipbuilder Huntington Ingalls Industries or the automotive manufacturer AM General), companies focused on providing services (such as Amentum or Booz Allen Hamilton), and corporations that generate most of their revenue from the civilian market (such as Microsoft or IBM).
Small Businesses
For the purposes of government contracting, small businesses are businesses that both meet the statutory definition of a small business and fall below certain size standards, as determined by the Small Business Administration (SBA).49 Per the terms of the Small Business Act (P.L. 85-536), a small business is “one which is independently owned and operated and which is not dominant in its field of operation.”50 In addition, it must be “organized for profit, with a place of business located in the United States, and … operate primarily within the United States or … make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.”51 Across the federal government, small businesses are eligible for preferential consideration with respect to certain categories of contracting actions (including the exclusive reservation of certain contracts) as well as numerous assistance and investment programs.52
Summarizing the role small businesses play in the DIB, Secretary of Defense Lloyd J. Austin III has stated that they “keep [U.S.] military forces combat ready with critical parts, cutting edge
46 “Top 100 for 2023,” Defense News, August 7, 2023, https://people.defensenews.com/top-100/. 47 Considered by national ownership, 6 of the largest 10 defense companies on this list were American, 3 were Chinese, and 1 was British. Ibid.
48 Despite the importance of firm size to contemporary policy debates, CRS was unable to locate a statutory or standard definition for large businesses in a defense context. One way to formulate such a definition would be to derive it from the SBA size standards used to define small businesses (refer to “Small Businesses” subsection of this report). These thresholds vary by NAICS code, but as the highest value of annual receipts and largest number of employees any firm can have to qualify as a small business are $47 million and 1,500, respectively, one practical definition could classify as large any business that either exceeds $47 million in annual receipts or employs more than 1,500 workers. See Small Business Administration, “Table of Small Business Size Standards,” June 21, 2023, https://www.sba.gov/federal-contracting/contracting-guide/size-standards.
49 For more information on small businesses and government contracting generally, see CRS Report R45576, An
Overview of Small Business Contracting. SBA size standards are determined by NAICS code and updated regularly. See Small Business Administration, “Table of Small Business Size Standards,” June 21, 2023, https://www.sba.gov/federal-contracting/contracting-guide/size-standards.
50 15 U.S.C. §632(a). 51 13 C.F.R. §121.105. 52 See CRS Report R45576, An Overview of Small Business Contracting.
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technology, and top-notch services, and fortify [U.S.] defense supply chains in times of crisis.”53 Although a majority of defense contractors are small businesses, they collectively receive a minority of DOD contract obligations.54 DOD reports that, between FY2011 and FY2020, between 25,000 and 30,000 small businesses have received direct contract obligations annually, and that such entities constitute “over 70% of the companies that do business with the Department.”55
Nonprofit and Public Sector
The nonprofit and public sector of the DIB is diverse, encompassing university and government affiliated research centers, DOD laboratories and test facilities, and government-owned industrial sites, among other entities. Considered in terms of military functions, this sector primarily supports RDT&E activities, the production of conventional ammunition, and the maintenance, repair, and overhaul of weapons systems.
FFRDCs and UARCs
DOD relies on federally funded research and development centers (FFRDCs) and university
affiliated research centers (UARCs) to conduct research, development, and related activities to identify, assess, develop, and transition technologies and concepts for military use.
FFRDCs are government-owned research institutions operated or administered by universities, not-for-profit organizations, or industrial firms. Per the Federal Acquisition Regulation (FAR), they are intended to “meet some special long-term research or development need which cannot be met as effectively by existing in-house or contractor resources.”56 Each FFRDC is sponsored by a federal agency. According to the National Science Foundation, there were 43 active FFRDCs as of February 2023, of which 10 were sponsored by DOD (see Table 2).57
Table 2. DOD-sponsored FFRDCs
FFRDC
Location
Administrator
Activity Type
Center for Communications
Alexandria, VA
Institute for Defense Analyses R&D Laboratory
and Computing
Lincoln Laboratory
Lexington, MA
Massachusetts Institute of
R&D Laboratory
Technology
Software Engineering
Pittsburgh, PA
Carnegie Mellon University
R&D Laboratory
Institute
Arroyo Center
Santa Monica, CA
RAND Corporation
Study and Analysis Center
53 DOD, “Small Business Strategy,” January 2023, p. 5. Available at https://media.defense.gov/2023/jan/26/2003150429/-1/-1/0/small-business-strategy.pdf.
54 According to DOD, small businesses tended to receive between $50 billion and $80 billion in annual contract obligation between FY2011 and FY2020. Ibid.
55 In FY2021, “73% of all companies that did business with DOD and 77% of all the research and development companies that did business with DOD were small businesses.” Ibid.
56 FAR 35.017, “Federally Funded Research and Development Centers.” 57 DOD further subdivides its FFRDCs by activity types: 3 are classified as research and development laboratories, 5 are study and analysis centers, and 2 are systems engineering and integration centers. In addition to DOD-sponsored FFRDCs, Department of Energy FFRDCs—which include the U.S. National Laboratories—support numerous defense applications, especially those connected with the nuclear enterprise. For more information on FFRDCs, see CRS Report R44629, Federally Funded Research and Development Centers (FFRDCs): Background and Issues for Congress.
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FFRDC
Location
Administrator
Activity Type
Project Air Force
Santa Monica, CA
RAND Corporation
Study and Analysis Center
National Defense Research
Santa Monica, CA
RAND Corporation
Study and Analysis Center
Institute
Center for Naval Analyses
Arlington, VA
CNA Corporation
Study and Analysis Center
Systems and Analyses
Alexandria, VA
Institute for Defense Analyses Study and Analysis Center
Center
Aerospace FFRDC
El Segundo, CA
The Aerospace Corporation
Systems Engineering and Integration Center
National Security
Bedford, MA and
MITRE Corporation
Systems Engineering and
Engineering Center
McLean, VA
Integration Center
Source: National Science Foundation, “Master Government List of FFRDCs,” February 2023, https://www.nsf.gov/statistics/ffrdclist/#activity. Notes: DOD reports that the total number of permanent technical staff employed by its sponsored FFRDCs is approximately 6,000. See USD R&E, “DOD FFRDCs,” https://rt.cto.mil/ffrdc-uarc/.
UARCs are nonprofit research organizations affiliated with a university and possessing one or more “core competencies” (which DOD defines as “areas of domain expertise or specialization”) that relate to DOD’s engineering, research, or development needs.58 Established in 1996, DOD’s UARC program currently includes 14 organizations, each of which is affiliated with a DOD office that serves as a “primary sponsor” (see Table 3).
Table 3. DOD UARCs
UARC
University
Primary Sponsor
Georgia Tech Research Institute
Georgia Institute of Technology
Army
Institute for Soldier Nanotechnologies
Massachusetts Institute of Technology
Army
Institute for Col aborative Biotechnologies
University of California, Santa Barbara
Army
Institute for Creative Technologies
University of Southern California
Army
Applied Physics Laboratory (JHU)
Johns Hopkins University
Navy
Applied Physics Laboratory (UW)
University of Washington
Navy
Applied Research Laboratory (PSU)
Penn State University
Navy
Applied Research Laboratory (UH)
University of Hawaii
Navy
Applied Research Laboratories (UT-Austin) University of Texas at Austin
Navy
Space Dynamics Laboratory
Utah State University
Missile Defense Agency
Systems Engineering Research Center
Stevens Institute of Technologya
DOD
Applied Research Laboratory for
University of Maryland, Col ege Park
Office of the Under
Intelligence & Security
Secretary of Defense for Intelligence & Security
National Strategic Research Institute
University of Nebraska
U.S. Strategic Command
58 Under Secretary of Defense for Research and Engineering, “FFRDC/UARC,” https://rt.cto.mil/ffrdc-uarc/.
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UARC
University
Primary Sponsor
Geophysical Detection of Nuclear
University of Alaska
Deputy Assistant
Proliferation
Secretary of Defense for Threat Reduction and Control
Source: Under Secretary of Defense for Research and Engineering, “FFRDC/UARC,” https://rt.cto.mil/ffrdc-uarc/ Notes: a. Stevens Institute of Technology is the lead university, but more than 20 other “col aborating universities”
also participate in the Systems Engineering Research Center.
DOD Laboratories
DOD operates a network of 20 science and technology reinvention laboratories, designated as such by 10 U.S.C. §4121 (see Table 4). According to DOD’s FY2024 budget materials, these laboratories “include dozens of facilities across 22 states and employ tens of thousands of uniformed, civilian and contractor scientists, engineers, and support personnel;” their activities range from “basic research to defense system acquisition support to direct operational support of deployed forces.”59
Table 4. DOD Science and Technology Reinvention Laboratories
Laboratory
Military Department
Air Force Research Laboratory
Air Force
Joint Warfare Analysis Center
Joint
Army Research Institute for the Behavioral and Social Sciences
Army
Combat Capabilities Development Command (CCDC) Armaments Center
Army
CCDC Aviation and Missile Center
Army
CCDC Chemical Biological Center
Army
CCDC C5ISR Centera
Army
CCDC Ground Vehicle Systems Center
Army
CCDC Soldier Center
Army
Engineer Research and Development Center
Army
Medical Research and Development Command
Army
Technical Center, US Army Space and Missile Defense Command
Army
Naval Air Systems Command Warfare Centers
Navy
Naval Facilities Engineering Command Engineering and Expeditionary Warfare Center
Navy
Naval Information Warfare Centers, Atlantic and Pacific
Navy
Naval Medical Research Center
Navy
Naval Research Laboratory
Navy
Naval Sea Systems Command Warfare Centers
Navy
59 Office of the Under Secretary of Defense (Comptroller), “FY2024 Defense Budget Overview”, March 2023, p. 79 (4-20), https://comptroller.defense.gov/portals/45/documents/defbudget/fy2024/fy2024_budget_request_overview_book.pdf.
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Laboratory
Military Department
Office of Naval Research
Navy
Source: 10 U.S.C. §4121 Notes: Some laboratories consist of multiple subordinate units with varying degrees of autonomy. For example, the Naval Sea Systems Command Warfare Centers consist of ten sites spread across the United States (see NAVSEA, “Warfare Centers,” at https://www.navsea.navy.mil/Home/Warfare-Centers/Who-We-Are/). a. C5ISR is a commonly used acronym that stands for Command, Control, Computers, Communications,
Cyber, Intelligence, Surveillance, and Reconnaissance.
DOD Ranges and Test Facilities
To test and demonstrate new technologies and capabilities, DOD operates a network of 23 “activities” that together constitute the Manufacturing Range and Test Facility Base (MRTFB). According to DOD, this infrastructure functions as a “national asset to provide [testing and evaluation] capabilities to support the DOD acquisition system.” As of 2023, the MRTFB was supported by approximately 30,000 personnel, and encompassed about 18,000 square miles of land and 180,000 square miles of airspace (see Figure 4).60
Figure 4. DOD Major Range and Test Facility Base
Source: CRS graphic developed from DOD, “DOD Directive 3200.11,” October 15, 2018.
60 For a description of the MRTFB, see Department of Defense, “DOD Directive 3200.11”, October 15, 2018, http://www.esd.whs.mil/Portals/54/Documents/DD/issuances/dodd/320011p.pdf. For more recent information on personnel and area, see Office of the Under Secretary of Defense (Comptroller), “FY2024 Defense Budget Overview”, March 2023, p. 79 (4-20), https://comptroller.defense.gov/portals/45/documents/defbudget/fy2024/fy2024_budget_request_overview_book.pdf.
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Notes: NAWCAD stands for Naval Air Warfare Center, Aircraft Division; NAWCWD stands for Naval Air Warfare Center, Weapons Division; JITC stands for Joint Interoperability Test Command; and AUTEC stands for Atlantic Undersea Test and Evaluation Center.
Government-Owned Production and Maintenance Facilities
DOD also maintains a network of industrial facilities that produce certain kinds of equipment (mainly conventional ammunition) and conduct repair, maintenance, and overhaul activities for various weapons systems. Often referred to as the organic industrial base, this network includes a variety of government-owned sites, including Army ammunition plants (AAPs) and related facilities as well as covered depots.61 These facilities may be either contractor-operated (as in the case of AAPs) or government-operated (as in the case of covered depots).
DOD maintains five government-owned, contractor-operated (GOCO) AAPs, as well as at least nine other industrial sites that support ammunition-related activities (see Figure 5). The GOCO AAPs produce most of the military’s conventional ammunition, propellants, and explosives.62
Figure 5. Ammunition Facilities
Army Ammunition Plants and Related Facilities
Source: CRS analysis of Joint Munitions Command data.
DOD owns and operates 21 government-owned, government operated (GOGO) maintenance locations statutorily designated as “covered depots”.63 These depots conduct depot-level
maintenance and repair, which is defined as “material maintenance or repair requiring the overhaul, upgrading, or rebuilding of parts, assemblies, or subassemblies, and the testing and reclamation of equipment.”64 Each military department (MILDEP) resources and manages the facilities that service its equipment; depending on the MILDEP and function, these may be called
61 The organic industrial base may also include other government-owned facilities that are not specifically identified in this section. See 10 U.S.C. §2476 regarding covered depots. AAPs are not statutorily defined.
62 For more information on ammunition production facilities, see CRS In Focus IF12251, Defense Primer:
Conventional Ammunition Production Industrial Base.
63 10 U.S.C. §2476. 64 10 U.S.C. §2460.
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depots, arsenals, shipyards, fleet readiness centers, air logistics centers, or logistics bases (see Figure 5).65
Figure 6. Covered Depots
DOD Facilities Designated as “Covered Depots” by 10 U.S.C. §2476
Source: CRS graphic based on 10 U.S.C. §2476.
Stockpiles
To ensure the availability of resources in emergency or wartime conditions, the U.S. government stockpiles certain defense-related products and materials. One such stockpiling program is the National Defense Stockpile (NDS), a DOD-managed reserve of strategic and critical materials intended to reduce or eliminate U.S. dependence on foreign or unreliable sources for materials vital to national defense.66 As of September 2021, the NDS contained over 45 materials collectively valued at over $1.2 billion.67 Other DIB-relevant stockpiles include the Strategic Petroleum Reserve, which contains crude oil, and the Strategic National Stockpile, which contains medical supplies.68
65 For more information on covered depots, see CRS In Focus IF11466, Defense Primer: Department of Defense
Maintenance Depots.
66 The National Defense Stockpile was established by the Strategic and Critical Materials Stockpiling Act of 1939, as amended (50 U.S.C. §§98 et seq.). For more information, see Defense Logistics Agency, “About Strategic Materials,” https://www.dla.mil/Strategic-Materials/About/.
67 Office of the Under Secretary of Defense for Acquisition & Sustainment, “FY2021 National Defense Stockpile Annual Operations and Planning Report,” February 2022, pp. 5-7. Document on file with the author. 68 For more information on the Strategic Petroleum Reserve, see CRS Report R46355, The Strategic Petroleum
Reserve: Background, Authorities, and Considerations; for more information on the Strategic National Stockpile, see CRS Report R47400, The Strategic National Stockpile: Overview and Issues for Congress.
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Government Stewardship of the DIB
In light of the DIB’s importance to national security—as well as the dependence of its constituent elements on government action—the executive and legislative branches devote significant attention to its resourcing, management, and oversight. A number of executive officials, bodies, and agencies conduct administrative and assessment activities intended to accomplish a variety of purposes, including ensuring the DIB’s ability to meet military requirements. Congress considers and passes legislation (including the establishment or modification of industrial base statutes, programs, and policies, as well as relevant appropriations) and conducts oversight and public information activities relating to the DIB.
The Role of the Executive
The President and the executive branch exercise a broad range of powers and responsibilities relating to the DIB. The President, as Commander in Chief, determines many of the objectives and requirements that the industrial base must support. Whether directly (as in the case of government entities) or indirectly (as in the case of private industry), the structure and output of the DIB are shaped by presidential priorities regarding national strategy, military requirements, and DOD policies and practices. Statutorily identified policy documents that reflect and articulate these priorities include:
• The National Security Strategy;69 • The National Defense Strategy;70 and • The Future-Years Defense Program (FYDP).71
In addition, the President may set policy and issue direction relating to the DIB through executive orders, presidential memoranda, and other administrative mechanisms.72 The President also possesses more specific statutory authorities relating to the management of defense production under the Defense Production Act of 1950 (described in a separate section below).
Within the executive branch, DOD is the agency primarily responsible for managing the DIB. Per 10 U.S.C. §4811(a), the Secretary of Defense must develop an industrial base strategy to achieve 11 national security objectives (see textbox below). Within DOD, the Under Secretary of Defense for Acquisition and Sustainment (USD A&S) is statutorily designated as the official responsible for “establishing policies for access to, and maintenance of, the defense industrial base and materials critical to national security.”73 The Assistant Secretary of Defense for Industrial Base Policy executes many of USD A&S’s industrial base responsibilities on a day-to-day basis.
69 Prepared pursuant to Section 108 of the National Security Act of 1947 (codified at 50 U.S.C. §3043). 70 Prepared pursuant to 10 U.S.C. §113(g) 71 Prepared pursuant to 10 U.S.C. §221. 72 Recent examples include Executive Order 13806 (issued in 2017), which directed DOD to assess the DIB and its supply chains as a whole, and Executive Order 14017 (issued in 2021), which directed DOD to, inter alia, assess supply chains for critical minerals and strategic materials.
73 10 U.S.C. §133b (3).
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NTIB National Security Objectives
10 U.S.C. §4811(a) requires the Secretary of Defense to develop a national security strategy that ensures the national technology and industrial base is capable of achieving the fol owing objectives:74
•
“Supplying, equipping, and supporting the force structure of the armed forces that is necessary to achieve [the objectives of the NSS, the NDS, and the FYDP].”
•
“Sustaining production, maintenance, repair, logistics, and other activities in support of military operations of various durations and intensity.”
•
“Maintaining advanced research and development activities to provide the armed forces with systems capable of ensuring technological superiority over potential adversaries.”
•
“Reconstituting within a reasonable period the capability to develop, produce, and support supplies and equipment, including technologically advanced systems, in sufficient quantities to prepare ful y for a war, national emergency, or mobilization of the armed forces before the commencement of that war, national emergency, or mobilization.”
•
“Providing for the development, manufacture, and supply of items and technologies critical to the production and sustainment of advanced military weapon systems within the national technology and industrial base.”
•
“Providing for the generation of services capabilities that are not core functions of the armed forces and that are critical to military operations within the national technology and industrial base.”
•
“Providing for the development, production, and integration of information technology within the national technology and industrial base.”
•
“Maintaining critical design skil s to ensure that the armed forces are provided with systems capable of ensuring technological superiority over potential adversaries.”
•
“Ensuring reliable sources of materials that are critical to national security, such as specialty metals, essential minerals, armor plate, and rare earth elements.”
•
“Reducing, to the maximum extent practicable, the presence of counterfeit parts in the supply chain and the risk associated with such parts.”
•
“Providing for the provision of drugs, biological products, vaccines, and critical medical supplies required to enable combat readiness and protect the health of the armed forces.”
Assistant Secretary of Defense for Industrial Base Policy
The Assistant Secretary of Defense for Industrial Base Policy (ASD (IBP)) serves as the principal advisor to USD (A&S) on matters related to the DIB. According to ASD (IBP), its organizational remit includes:
• Developing DOD policies for the maintenance of the U.S. DIB; • Executing small business programs and policy; • Conducting geo-economic analysis and assessments; • Providing recommendations on budget matters related to the DIB; • Anticipating and closing gaps in manufacturing capabilities for defense systems; • Assessing impacts related to mergers, acquisitions, and divestitures; • Monitoring and assessing impact of foreign investments in the United States; and • Executing authorities under 10 U.S.C. §4811 and §4852.75
74 10 U.S.C. §4811(a)(1)-(11). 75 DOD, “About Industrial Base Policy,” accessed August 8, 2023. Available at https://www.businessdefense.gov/about-us.html.
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The ASD (IBP) organization is structured by function (see Figure 4 below). The Deputy Assistant Secretary of Defense for Industrial Base Resilience (DASD (IBR)) is responsible for assessing and managing DIB vulnerabilities, developing relevant acquisition and investment strategies, managing vulnerabilities posed by adversarial capital, and supporting the DIB workforce.76 To execute these functions, DASD (IBR) conducts industrial base assessments, monitors and advises on foreign investment risks, and administers DPA Title III, Industrial Base Fund, and related activities.
The Deputy Assistant Secretary of Defense for Industrial Base Development & International Engagement (DASD (IBD&IE)) is responsible for managing partnerships and engaging with domestic DIB entities as well as foreign governments and industry.77
Finally, the Office of Small Business Programs (OSBP) manages policy, administers funding, and coordinates programs intended to increase small business participation in the DIB.78
Figure 7. ASD (IBP) Organizational Chart
Source: DOD, “ASD (IBP) Organizational Chart,” accessed October 10, 2023 at https://www.businessdefense.gov/docs/org-chart/org-chart.pdf.
76 DOD, “DASD Industrial Base Resilience,” https://www.businessdefense.gov/ibr/index.html. 77 DOD, “DASD Industrial Base Development & International Engagement,” https://www.businessdefense.gov/icie/index.html.
78 OSBP-managed programs include the Mentor-Protégé Program, the APEX Accelerators program (formerly the Procurement Technical Assistance Center program) and the Indian Incentive Program. Relevant policy documents relating to OSBP’s role include DOD Instructions 5134.04 (“Director of Small Business Programs”) and 4205.01 (“DOD Small Business Programs.” For more information, see Office of Small Business Programs, “About,” https://business.defense.gov/About/.
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Other DOD Organizations
Given the size, complexity, and military importance of the DIB, many other DOD organizations are also involved in industrial base matters. At the Office of the Secretary of Defense (OSD) level, these include the Offices of the Under Secretaries of Acquisition and Sustainment (A&S) and Research and Engineering (R&E), the Defense Logistics Agency (DLA), the Office of Strategic Capital (OSC), the Defense Contract Management Agency (DCMA), the Defense Counterintelligence and Security Agency (DCSA), the Defense Security Cooperation Agency (DSCA), and others. Each military department (MILDEP) also manages organizations that routinely handle industrial base policy, programs, and engagement in the course of executing their assigned RDT&E, procurement, logistics, planning, and related functions.79 Publications and administrative mechanisms used to manage DIB issues include DOD forms, directives, instructions, and other issuances.80 In addition, DOD uses several forums and working groups to coordinate and share information on certain DIB issues.81
Other Executive Branch Agencies
In addition to DOD, a number of other agencies and organizations in the executive branch play a role in managing the DIB. The Department of Commerce (DOC) Bureau of Industry and Security (BIS), for example, routinely assesses defense-related technologies, surveys aspects of the broader industrial base, and monitors DIB-related economic and trade developments.82 DOC-DOD collaboration has also been formalized through a number of interagency agreements, including recent Memoranda of Agreement (MOAs) concerning semiconductors and space-related technologies.83 Other agencies and organizations with DIB-related roles and responsibilities include the Department of Homeland Security, the members of the Intelligence Community, the Department of Justice and the Federal Trade Commission, and others.
The Defense Production Act of 1950
The DPA (P.L. 81-774; codified as 50 U.S.C. §§4501 et seq.) provides the President with authorities to “shape national defense preparedness programs and to take appropriate steps to maintain and enhance the domestic industrial base.”84 These are commonly known as Title I, Title III, and Title VII authorities, in reference to the DPA provisions by which they were established.
79 As an example, the MILDEPs operate various Program Executive Offices (PEOs) to manage the acquisition of particular weapons systems or categories of equipment.
80 Industrial base matters tend to be addressed by DOD instructions in the ‘5000 series’ (that is, those with issuance numbers between 5000 and 5100). For active DOD issuances, see Washington Headquarters Service, “DOD Issuances,” at https://www.esd.whs.mil/DD/DoD-Issuances/. 81 According to a 2022 GAO report, these include the Industrial Base Council, the Joint Industrial Base Working Group, and the Supply Chain Resiliency Working Group. See GAO, “DOD Should Take Actions to Strengthen its Risk Mitigation Approach,” July 2022, pp. 5-6. Available at https://www.gao.gov/assets/gao-22-104154.pdf. 82 Department of Commerce, “Industrial Base Assessments,” Bureau of Industry and Security, accessed August 9, 2023, https://www.bis.doc.gov/index.php/other-areas/office-of-technology-evaluation-ote/industrial-base-assessments.
83 Department of Defense, “Department of Commerce and Department of Defense Sign Memorandum of Agreement to Strengthen U.S. Defense Industrial Base,” Press Release, July 26, 2023, https://www.defense.gov/News/Releases/Release/Article/3470881/department-of-commerce-and-department-of-defense-sign-memorandum-of-agreement-t/; and Department of Commerce, “Department of Commerce and Department of Defense Sign Memorandum of Agreement to Advance Coordination in Space,” Press Release, September 9, 2022, https://www.commerce.gov/news/press-releases/2022/09/department-commerce-and-department-defense-sign-memorandum-agreement.
84 See 50 U.S.C. §4502, which provides both findings and a statement of policy concerning the purposes and provisions of the DPA.
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Broadly speaking, Title I authorities allow the President to require U.S. entities to prioritize and accept certain defense-related contracts. Title III authorities allow the President to offer certain financial incentives (including loans and loan guarantees, purchases and purchase commitments, and the direct procurement of equipment) to domestic suppliers in order to expand defense-related production. Title VII authorities allow the President to, inter alia, establish voluntary agreements with industry, block certain corporate mergers and acquisitions, and establish a volunteer pool of industry executives available for government service.85
Initially, these DPA authorities were used to support U.S. participation in the Korean War.86 In subsequent decades, Congress has re-authorized and amended various DPA provisions dozens of times, as well as established requirements or directions concerning implementation (often in annual NDAA legislation).87 Successive presidential administrations have used DPA authorities—particularly those provided by Title I and Title III—for a wide variety of defense purposes: in 2023, for example, President Biden has invoked the DPA for hypersonics production and microelectronics supply chains.88
In recent years, the DPA has also been used for applications outside the traditional remit of DOD.89 The COVID-19 pandemic, in particular, led to a significant increase in the scale and diversity of applications to which DPA Title I and III authorities were put: between March 2020 and September 2021, for instance, pandemic-related uses included at least 73 Title I actions and 60 Title III projects.90
The Role of Congress
Congress makes appropriations for both acquisition contract actions and the direct funding of government facilities and organizations, meaning that it exercises a high degree of influence over the resourcing of the entire DIB. It also considers and passes legislation to establish or modify statutes, programs, and policy related to industrial base matters. Additionally, Congress oversees
85 Title I is codified at 50 U.S.C. §§4511-4518; Title III at 50 U.S.C. §§4531-4534; and Title VII at 50 U.S.C. §§4551-4568.
86 As initially enacted, the DPA included four additional authorities: Title II – Authority to requisition; Title IV – Price and wage stabilization; Title V – Settlement of labor disputes, and; Title VI – Control of consumer and real estate credit. These lapsed in 1953. See CRS Report R43767, The Defense Production Act of 1950: History, Authorities, and
Considerations for Congress, p. 2.
87 Since 1950, Congress has re-authorized various DPA provisions at least 53 times. Ibid., p. 3. 88 DOD, “DPA Title III Presidential Determination for Hypersonic Systems,” DOD Press Release, March 3, 2023, https://www.defense.gov/News/Releases/Release/Article/3317872/defense-production-act-title-iii-presidential-determination-for-airbreathing-en/; and DOD, “DPA III Presidential Determination for Printed Circuit Boards and Advanced Packaging Production Capability,” DOD Press Release, March 27, 2023, https://www.defense.gov/News/Releases/Release/Article/3342032/defense-production-act-title-iii-presidential-determination-for-printed-circuit/.
89 Recent invocations have addressed the prioritization of infant formula contracts (2022) and the production of clean energy equipment (2022). “Memorandum on the Delegation of Authority under the DPA,” The White House, May 18, 2022, https://www.whitehouse.gov/briefing-room/presidential-actions/2022/05/18/memorandum-on-the-delegation-of-authority-under-the-defense-production-act-to-ensure-an-adequate-supply-of-infant-formula/; and “President Biden Invokes Defense Production Act,” Department of Energy, June 6, 2022, https://www.energy.gov/articles/president-biden-invokes-defense-production-act-accelerate-domestic-manufacturing-clean.
90 These uses ranged from the prioritization of personal protective equipment contracts to investments in vaccine manufacturing capabilities. See COVID-19: Agencies Are Taking Steps to Improve Future Use of Defense Production
Act Authorities, Government Accountability Office, December 2021. Available online at https://www.gao.gov/assets/gao-22-105380.pdf. For more information on other COVID-related DPA uses, see CRS Insight IN11619, New COVID-19 Defense Production Act (DPA) Actions: Implementation Considerations.
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both the DIB itself—through hearings, studies, etc.—and the DIB-related actions of DOD and the executive branch as whole.
Resourcing the DIB
The congressional appropriations committees—particularly the subcommittees on defense—and the congressional armed services committees play the largest roles in making appropriations related to the DIB.91 Taken in the aggregate, congressional funding decisions for thousands of individual DOD programs and activities constitute a critical factor in determining the size, composition, and function of the industrial base.
Broadly speaking, there is a positive correlation between top-line defense budgets and industrial base production. When annual defense spending, especially for RDT&E and Procurement, is trending upward in real terms, DIB output tends to rise as well; conversely, flat or shrinking defense budgets tend to correlate with static or declining industrial output.92 This has been attributed not only to the short-term impact of providing more funds to suppliers, but also to the perception of budget increases as a longer-term ‘demand signal’ for the commercial DIB: if contractors believe Congress will continue to raise spending, they may choose to invest in expanding their ability to provide materials, products, and services.93
Beyond funding individual acquisition programs, Congress also makes appropriations intended to support the broader DIB. Examples include:
• Production Base Support, a budget activity under the Procurement of
Ammunition, Army appropriation that may fund capital projects at public and private industrial facilities performing ammunition-related functions;94
• The DPA Fund, which may fund DPA Title III activities,95 and; • The Industrial Base Fund, which may fund efforts to monitor and expand the
DIB, address urgent operational needs, and mitigate supply chain vulnerabilities.96
Statute, Programs, and Policy
Congress routinely considers and passes legislation focused on managing the DIB. This may involve the creation, modification, or elimination of statutory authorities (e.g., multi-year procurement for certain weapons), programs (e.g., expanding the functions of the Industrial Base Fund), or policies (e.g., issuing a statement of policy regarding the shipbuilding industrial base).
91 For more information on the defense appropriations process generally, see CRS In Focus IF10514, Defense Primer:
Defense Appropriations Process.
92 For a visual illustration of this trend, compare the depiction of historical defense outlays in Figure 1 with that of historical DIB production output in Figure 2.
93 They may, for instance, hire more workers, expand facilities, or devote more of their own resources to developing new products or improving existing ones.
94 Such capital projects may include construction, land acquisition, and the procurement and installation of equipment, appliances, and machine tools. For more information, see DOD, “FY2024 Budget Estimates: Procurement of Ammunition, Army,” March 2023, p. 1- 748. Available at https://www.asafm.army.mil/Portals/72/Documents/BudgetMaterial/2024/Base%20Budget/Procurement/Procurement%20of%20Ammunition%20Army.pdf.
95 The DPA fund is established and described at 50 U.S.C. §4534. 96 The Industrial Base Fund is established and described at 10 U.S.C. §4817.
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The legislation Congress uses to manage the industrial base varies widely in scope, purpose, and form. The annual National Defense Authorization Act (NDAA) is frequently used as a vehicle for DIB-related provisions, and typically features a subtitle devoted to “industrial base matters” (in the enacted FY2023 NDAA, this was listed as Subtitle E of Title VIII). The topics of industrial base provisions are diverse: recent enacted and proposed NDAA legislation has included provisions intended to incentivize investment in expanding DIB capacity, strengthen supply chain resilience and domestic sourcing requirements, and promote competition and diversification among the defense industry.97
Oversight
To oversee the DIB, Congress convenes hearings and commissions reports and studies.98 These serve to furnish Congress with information regarding both the industrial base itself and executive branch management. They also provide opportunities for Members to signal their priorities and intent to DOD, other executive agencies, and private industry.
Issues for Congress
‘Right-Sizing’ the Industrial Base
Assessing and Managing Capacity
One of the most fundamental DIB-related matters for Congress to consider is the level of industrial capacity required to meet the defense needs of the United States. As defined by the Federal Reserve, industrial capacity is a measure of “the amount of resources available to enable an industry to produce goods.”99 Such resources may include production facilities and equipment, labor, and raw materials; some definitions also include less tangible assets such as intellectual property.100 One issue for Congress is whether or not the current defense industrial capacity of the United States is sufficient to meet U.S. national security goals.
Because productive output is ultimately a function of capacity, an appropriately-sized industrial base is essential to the United States’ ability to supply and equip its military forces. In addition to supporting current military needs, the resources available to the DIB must be able to accommodate future demand. This latter requirement makes surge capacity—the ability to quickly expand output in response to sudden upticks in demand—an important dimension of broader industrial capacity.
97 For information on industrial base provisions in the FY2024 NDAA, for example, see CRS Insight IN12221, FY2024
NDAA: Defense Industrial Base Policy.
98 For an example of a recent DIB-focused hearing, see House Armed Services Committee, “State of the Defense Industrial Base,” February 8, 2023, video and statements available at https://armedservices.house.gov/hearings/full-committee-hearing-state-defense-industrial-base.
99 Board of Governors of the Federal Reserve System, “Industrial Capacity: Total Index,” August 15, 2023 at https://fred.stlouisfed.org/series/capb50001sq#. Another Federal Reserve publication defines capacity as “the maximum sustainable output of an industry.” Charles Steindel, “Industrial Capacity & Industrial Investment,” Federal Reserve Bank of New York, May 1995, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/research_papers/9510.pdf
100 One analysis of the defense industry cited six major “factors of production”: 1) production buildings, machinery, and equipment; 2) RDT&E buildings, machinery, and equipment; 3) hourly production labor; 4) scientists, engineers, and technicians; 5) management; and 6) entrepreneurship. Peck and Scherer, The Weapons Acquisition Process, p. 160.
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If the DIB is too small, it will be unable to supply all of the materials, products, and services necessary to accomplish U.S. strategic objectives, and the military may lack the ability to execute its assigned missions. Conversely, an industrial base with excess capacity could impose unnecessary financial costs on the U.S. government, requiring cuts to other programs, increased borrowing, or higher taxes.101 An oversized DIB may also distort the functioning of the country’s market economy by diverting resources from other commercial applications.102
If Congress assesses that the DIB is undersized, a number of measures are possible. It could appropriate more funds to acquisition programs for specific capabilities, for instance, or to more general industrial base programs like the IBF or DPA Title III. Congress could also establish or modify programs to provide direct economic assistance to defense firms, incentivize private investment, or facilitate workforce recruitment, retention, and job training programs. It could also change DOD contracting and acquisition practices, or expand government-owned capacity directly through the creation or expansion of organic industrial base facilities.
If, on the other hand, Congress views DIB capacity as excessive, it might enact spending cuts, reduce the scope and resourcing of industrial base programs, modify DOD contracting and acquisition strategies, and close or shrink government-owned entities.
The DIB and Great Power Competition
Some analysts and policymakers have argued that the current capacity of the industrial base is insufficient for the demands of great power competition.103 As Seth Jones of the Center for Strategic and International Studies (CSIS) framed the problem in a 2023 study:
The U.S. defense industrial base is not adequately prepared for the competitive security environment that now exists. It is currently operating at a tempo better suited to a peacetime environment. In a major regional conflict—such as a war with China in the Taiwan Strait—the U.S. use of munitions would likely exceed the current stockpiles of the U.S. Department of Defense, leading to a problem of “empty bins.”104
Some think tanks, periodicals, DOD officials, and Members of Congress have voiced similar concerns.105 These arguments often center on the role the industrial base would play in a great power war, and make reference to studies, wargames, and forecasts suggesting the United States could run short of critical defense equipment in a conflict (especially one involving China).106 Industrial capacity could help determine the outcome of such a contingency in two broad ways: 1) enabling production in advance, so equipment could be stockpiled and prepositioned; and 2) allowing materiel to be replenished after hostilities have begun. In addition to conditioning U.S.
101 For one perspective on the potential costs of excess capacity, see “The Rising Costs of Militarism Fact Sheet,” Quincy Institute, April 2023, https://quincyinst.org/wp-content/uploads/2023/04/CrossOfIronFactSheet.pdf.
102 See, for instance, Gholz and Sapolsky, “Restructuring the Defense Industry,” pp. 12-16. 103 For more information on great power competition, see CRS Report R43838, Great Power Competition: Implications
for Defense—Issues for Congress.
104 Seth G. Jones, Empty Bins in a Wartime Environment, CSIS, January 2023, p. 1, https://csis-website-prod.s3.amazonaws.com/s3fs-public/2023-01/230119_Jones_Empty_Bins.pdf.
105 See for example, Caroline Coudriet, “Lawmakers Worry About Weapons-Makers’ Ability to Meet Demand,” Roll
Call, February 6, 2023, https://rollcall.com/2023/02/06/lawmakers-worry-about-weapons-makers-ability-to-meet-demand/.
106 In one of the most frequently cited wargames simulating a U.S.-China conflict, the U.S. military used all of its LRASMs [long range anti-ship missiles] in the initial days of the conflict, and tended to expend “about 5,000 long-range precision missiles, primarily JASSMs [joint air-to-surface standoff missiles] and LRASMs.” Mark Cancian et al., “The First Battle of the Next War,” CSIS, January 2023, p. 136, https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/230109_Cancian_FirstBattle_NextWar.pdf.
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military performance during a conflict, advocates of expanding industrial capacity have touted it as a means of strengthening deterrence. If potential adversaries believe U.S. industry can sustain a war effort indefinitely, this argument runs, they may be less likely to risk conflict.107
Among advocates of expanding capacity, some have called for prioritizing precision-guided munitions, citing their military importance, technological complexity, and high expenditure rates.108 Some commentators and policymakers have also identified production issues for less sophisticated munitions (e.g., 155 mm artillery rounds).109 According to DOD, the munitions that are “most relevant for deterring and, if necessary, prevailing over aggression in the Indo-Pacific” include the Tomahawk cruise missile (together with its maritime strike variant), the Extended-Range Joint Air-to-Surface Standoff Missile (JASSM-ER), the Long Range Anti-Ship Missile (LRASM), and the SM-6 naval missile.110 Beyond munitions, some policymakers and analysts also advocate expanding the capacity to produce larger weapons platforms, such as nuclear-powered attack submarines, as well as other items ranging from rocket motors to microchips.111
Some other analysts and policymakers maintain that existing capacity more than suffices to deter or win a great power conflict. Some cite the economic and production advantages the United States enjoys over its potential adversaries, and assert that, when it comes to defense industrial capacity, “the overall picture is one of stability and health, not decline.”112 Others argue that calls to drastically increase production reflect the incentives of defense contractors, rather than independently existing military requirements, and caution that the establishment of new DIB facilities inherently creates “pressure to keep them open in perpetuity, at a cost of untold billions of dollars.”113
107 For an example of this argument, see remarks made on March 22, 2022 by Under Secretary of Defense for Acquisition and Sustainment William LaPlante during a Senate Armed Services Committee hearing (“I believe we need multiple hot production lines, whether it be munitions, [unmanned aircraft systems], and the like. They, by themselves, are a deterrent.”). Video available at https://www.armed-services.senate.gov/hearings/nominations_-laplante-raven-johnson-adams.
108 See, for instance, Tyler Hacker, “Money Isn’t Enough: Getting Serious About Precision Munitions,” War on the
Rocks, April 24, 2023, https://warontherocks.com/2023/04/money-isnt-enough-getting-serious-about-precision-munitions/.
109 See Patrick Tucker, “Army Aims to Make 1 Million Artillery Shells a Year,” Defense One, August 7, 2023, https://www.defenseone.com/technology/2023/08/army-aims-make-1-million-artillery-shells-year-starting-fiscal-2025/389202/.
110 Deputy Secretary of Defense Kathleen Hicks, “Press Briefing on President Biden's Fiscal 2024 Defense Budget,” DOD Press Briefing, March 13, 2023, transcript available at https://www.defense.gov/News/Transcripts/Transcript/Article/3327914/deputy-secretary-hicks-and-vice-chairman-adm-grady-hold-a-press-briefing-on-pre/.
111 See, for example, Senator Roger Wicker (MS), “The U.S. Navy Needs More Attack Submarines,” The Wall Street
Journal, July 16, 2023. Available at https://www.wsj.com/articles/the-u-s-navy-needs-more-attack-submarines-china-aukus-missile-repair-9f5965f, and Senator Blumenthal (CT), “Blumenthal Applauds Wins for Connecticut in Senate-passed NDAA,” Press Release, July 27, 2023, https://www.blumenthal.senate.gov/newsroom/press/release/blumenthal-applauds-wins-for-connecticut-in-senate-passed-national-defense-authorization-bill.
112 Scott Lincicome, “Manufactured Crisis: ‘Deindustrialization,’ Free Markets, and National Security,” Cato Institute, January 27, 2021, https://www.cato.org/publications/policy-analysis/manufactured-crisis-deindustrialization-free-markets-national-security. For another assessment of the defense industry as “financially healthy,” see DOD, “Contract Finance Study Report,” April 2023, https://www.acq.osd.mil/asda/dpc/pcf/docs/finance-study/FINAL%20-%20Defense%20Contract%20Finance%20Study%20Report%204.6.23.pdf.
113 William Hartung, “New Spending Bill Squanders Billions on Dysfunctional Weapons Systems,” Responsible
Statecraft, December 9, 2022, https://responsiblestatecraft.org/2022/12/09/new-pentagon-bill-squanders-opportunity-to-rein-in-the-military-industrial-complex/.
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An Arsenal of Democracy?
Providing large-scale support for U.S.-aligned governments—as the DIB is currently doing for Ukraine—is also frequently cited as a rationale for increasing capacity. Some analysts and policymakers argue that, rather than just supplying U.S. needs, the DIB should function as an ‘arsenal of democracy.’114 To accomplish this, the industrial base would need enough capacity to produce a wide array of defense equipment for allies and partners: in addition to Ukraine, Taiwan is frequently discussed as a major recipient of such materiel.115 While certain advocates of this approach maintain that the United States can support a DIB large enough to “both arm Ukraine and bolster deterrence in Asia,” others argue that capacity constraints require the prioritization of one partner over the other.116
Conversely, some lawmakers and commentators take the position that the industrial base should focus primarily or exclusively on supplying U.S. forces. In an April 2023 letter to President Biden, three Senators and sixteen Representatives asserted that the production and delivery of defense equipment for use by Ukraine was leaving the U.S. military “woefully unprepared” for a potential conflict.117 Other analysts have also argued that the best way to support U.S. partners would be to “use existing defense industrial bandwidth more efficiently,” rather than to expand capacity.118
Some observers have viewed the performance of existing security assistance programs (especially efforts to arm Ukraine) as a ‘stress test’ for the DIB. Some Members and analysts claim that U.S. efforts to supply Ukraine have exposed capacity shortfalls: in a 2023 hearing, for instance, House Armed Services Committee Chairman Representative Mike Rogers (AL-03) asserted that arming Ukraine had “laid bare many of our vulnerabilities, especially with respect to our ability to rapidly produce and field munitions.”119 Others have argued that the efficacy with which Ukraine has used U.S.-origin equipment to inflict losses on Russian forces is proof that leveraging existing capacity can achieve outsized results.120
114 See, for example, “The West is Struggling to Forge a New Arsenal of Democracy,” The Economist, February 19, 2023, https://www.economist.com/briefing/2023/02/19/the-west-is-struggling-to-forge-a-new-arsenal-of-democracy.
115 See, for example, Edward Wong, “U.S. Aims to Turn Taiwan into Giant Weapons Depot,” The New York Times, October 5, 2022. Available at https://www.nytimes.com/2022/10/05/us/politics/taiwan-biden-weapons-china.html.
116 For an example of the first argument, see Michael Allen and Connor Pfeiffer, “The U.S. Can Help Ukraine and Deter China,” The Wall Street Journal, July 18, 2023, https://www.wsj.com/articles/the-us-can-help-ukraine-and-deter-china-javelin-stinger-nat-sec-taiwan-9779ada5?; for an example of the second, see Elbridge Colby and Alex Velez-Green, “To Avert War with China, the U.S. Must Prioritize Taiwan over Ukraine,” The Washington Post, May 18, 2023 at https://www.washingtonpost.com/opinions/2023/05/18/taiwan-ukraine-support-russia-china/.
117 Sen. Mike Lee (UT) et al., “Letter to President Biden,” April 20, 2023, https://www.lee.senate.gov/services/files/582d6601-a680-45a0-90e4-a92e91b4e2b3.
118 Jennifer Kavanagh, “Why the United States Doesn’t Need An ‘Arsenal of Democracy,’” Georgetown Journal of
International Affairs, May 22, 2023, https://gjia.georgetown.edu/2023/05/22/why-the-united-states-doesnt-need-an-arsenal-for-democracy-and-what-to-do-instead/.
119 Similarly, two former White House officials wrote in a 2022 opinion piece that assistance to Ukraine had “demonstrated that America’s defense-industrial base isn’t up to the job of supplying the U.S. military with weapons for a prolonged conventional conflict.” Elbridge Colby and Alexander Gray, “America’s Industrial Base Isn’t Ready for War with China,” The Wall Street Journal, August 18, 2022, and Rep. Mike Rogers (AL-03), “Opening Statement At Hearing on U.S. Defense Industrial Base,” February 8, 2023, https://armedservices.house.gov/news/press-releases/rogers-opening-statement-hearing-us-defense-industrial-base.
120 See, for example, Timothy Ash, “It’s Costing Peanuts for the U.S. to Defeat Russia,” Center for European Policy Analysis, November 18, 2022, https://cepa.org/article/its-costing-peanuts-for-the-us-to-defeat-russia/.
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Regulating Private Industry
Competition and Consolidation
Another issue for congressional consideration is the prevalence of competition and consolidation within the defense industry. Some Members of Congress and successive presidential administrations have viewed the existence of economic competition within the commercial DIB as an important policy priority. Proponents of competition have noted that it may produce a number of desirable outcomes for the customer (i.e., the U.S. government), frequently citing the following three in the context of defense:
• Lower costs, accelerated schedules, and improved performance; • Expanded capacity; and • Technological innovation.121
Because consolidation concentrates the supply of defense products and services among fewer entities, some experts maintain that it weakens competition and thus creates adverse outcomes for the U.S. government.
Addressing competition and consolidation in the DIB poses unique challenges as compared to other industries. As a former chairman of the Federal Trade Commission put it in a 1997 SASC hearing:
The analysis of mergers in the defense industry is challenging because of [its] many special characteristics.... [DOD] is often the only buyer for the products and services of the merging firms, and its procurement processes are different from those in most industries. The products (e.g., weapons systems) being procured are often complex and heterogeneous systems that are frequently purchased on a winner-take-all basis. Finally, national security may be implicated in a defense industry merger.122
Beginning in the early 1990s, the defense industry underwent significant consolidation, decreasing the number of firms competing for DOD contracts. As noted in the “Historical
Development of the DIB” section of this report, the primary cause was a shift in U.S. defense spending: given the changing geopolitical conditions of the post-Cold War era, Congress made fewer resources available to DOD for defense contracts.123 Both government and industry saw consolidation as a way of limiting the economic impacts of budget cuts while preserving capacity. Through engagement with industry and targeted policies, DOD encouraged mergers and acquisitions, with the result that the number of private businesses active in the DIB decreased markedly.124 Consolidation was particularly pronounced among suppliers of certain weapons
121 See, for example, DOD, “State of Competition within the Defense Industrial Base,” February 2022, p. 1. Available at https://media.defense.gov/2022/feb/15/2002939087/-1/-1/1/state-of-competition-within-the-defense-industrial-base.pdf. For a similar summary of the benefits of competition, see also the opening statement of Sen. Jack Reed (RI) in “The Health of the Defense Industrial Base,” SASC Hearing, April 26, 2022, video available at https://www.armed-services.senate.gov/hearings/to-receive-testimony-on-the-health-of-the-defense-industrial-base.
122 Robert Pitofsky, “Mergers and Acquisitions in the Defense Industry,” Statement delivered before the SASC Subcommittee on Acquisition and Technology, April 15, 1997, text available at https://www.ftc.gov/news-events/news/speeches/mergers-acquisitions-defense-industry.
123 Other contributing factors include the prevalence of low interest rates, which can make mergers and acquisitions more attractive, and an intellectual property regime that allows suppliers of defense equipment and services to retain rights to data without which those products cannot be produced or maintained. See DOD, “State of Competition within the DIB,” pp. 4-5. 124 Perhaps the most famous engagement between government and industry on this topic was a 1993 dinner known as (continued...)
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system categories (e.g., tactical missiles, fixed-wing aircraft, and satellites), and ultimately reduced the number of major U.S. defense prime contractors from 51 to 5 (see Figure 8 for a visual representation of this process).125 As of 2023, these 5 companies (Lockheed Martin, Boeing, RTX, General Dynamics, and Northrop Grumman) were prime contractors on over 74% of DOD’s major defense acquisition programs.126
Although DOD policy changed and the pace of consolidation began to slow in the late 2000s, defense mergers and acquisitions have continued through the present. Some high-profile corporate combinations concluded in the past five years include:
• The acquisition of Aerojet Rocketdyne by L3Harris (2023); • The merger of Raytheon (now RTX) with United Technologies (2020); and • The acquisition of Orbital ATK by Northrop Grumman (2018).
“The Last Supper,” at which the Secretary of Defense told the executives of more than 12 large defense firms that DOD could not support the existing number of major defense suppliers, and advised them to pursue consolidation. DOD also encouraged mergers and acquisitions through policies that, among other things, allowed contractors to be reimbursed by the federal government for certain corporate restructuring costs incurred under merged contracts. Jonathan Chang and Mghna Chakrabarti, “‘The Last Supper’: How a 1993 Pentagon Dinner Reshaped the Defense Industry,” WBUR, May 29, 2023 at https://www.wbur.org/onpoint/2023/05/29/the-last-supper-rebroadcast-1993-pentagon-dinner-reshaped-defense-industry; and Gholz and Sapolsky, “Restructuring the U.S. Defense Industry,” p. 24.
125 DOD, “State of Competition within the DIB.” 126 CRS analysis of information provided in DOD, “FY2024 Program Acquisition Costs by Weapon System,” March 2023, https://comptroller.defense.gov/Portals/45/Documents/defbudget/FY2024/FY2024_Weapons.pdf.
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Figure 8. Consolidation in the Defense Industry
Corporate mergers and acquisitions, 1980-2015
Source: Graphic from DOD, “State of Competition within the Defense Industrial Base,” February 2022, https://media.defense.gov/2022/feb/15/2002939087/-1/-1/1/state-of-competition-within-the-defense-industrial-base.pdf.
The impact of this process on the performance of the DIB remains unclear. Some analysts have argued that it led to a real decline in industrial capacity, weakened the resilience of defense-related supply chains, and—by decreasing competition—negatively affected the cost, schedule, and performance of defense acquisition projects.127 Others have held that the capacity impacts of these mergers and acquisitions were minimal, as the capital assets and workforces of acquired firms were often retained by their new owners, and that consolidation has not been proven to have led to increases in acquisition costs.128
Following the reorientation of U.S. strategy around great power competition in the 2010s and early 2020s, the extent of industry consolidation has attracted attention from defense officials. In a 2022 report, DOD found that consolidation had made it “increasingly reliant on a small number of contractors for critical defense capabilities,” and observed that further “consolidations that reduce required capability and capacity and the depth of competition would have serious
127 See, for example, Michael Brenes, “How America Broke Its War Machine,” Foreign Affairs, July 3, 2023, https://www.foreignaffairs.com/united-states/how-america-broke-its-war-machine.
128 For an example of this argument regarding capacity, see Gholz and Sapolsky, “Restructuring the U.S. Defense Industry,” pp. 26-28. For an assessment of consolidation’s effect on acquisition costs, see Rodrigo Carril and Mark Duggan, “The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting,” National Bureau of Economic Research, October 2018. Available at https://www.nber.org/system/files/working_papers/w25160/w25160.pdf.
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consequences for national security.”129 The current Under Secretary of Defense for Acquisition and Sustainment has also identified consolidation as an enduring area of concern.130
The issue has also been the subject of congressional deliberation. In a February 2023 hearing, for instance, Representative Chris Deluzio (PA-17) stated that consolidation is “leaving us unprepared and harming our national security and readiness.”131 And in an April 2022 hearing Senate Armed Services Committee chairman Senator Jack Reed (RI) stated that he was “concerned by the impact of the consolidation of private [defense] companies,” while Senator Mike Rounds (SD) made reference to “a very disturbing trend of consolidation within the defense industrial base over the last 20 to 30 years.”132
Members of Congress also have cited potentially deleterious effects of consolidation in opposition to specific mergers and acquisitions. In a July 2023 letter opposing the acquisition of Aerojet Rocketdyne by L3Harris, for instance, four Members argued that “waves of merger activity and consolidation have transformed our nation’s defense industry from a competitive market … into an oligopoly,” and alleged that this was partly responsible for the solid rocket motor sector “failing to meet U.S. national security needs.”133
Not all experts agree that consolidation has exclusively negative effects, or that its current extent among the defense industry represents a crisis. As former Secretary of the Army Eric Fanning put it in a recent congressional hearing:
I don't think consolidation is what's to blame for the shrinking number of companies doing business with the Department of Defense … consolidation can be a very important tool for growth for large companies. It can be an important tool for small companies to access capital, to access workforce processes, expertise or so forth to continue to develop what it is that they're growing. And it's an important part of every industry's evolution.134
Some analysts have also argued that consolidation improves the efficiency of the defense industry, lowering costs by eliminating excess capacity and enabling economies of scale.135
If Congress assesses that consolidation is a problem within the commercial DIB, it may consider a number of options. Congress could statutorily establish new requirements for merger oversight within the commercial DIB, or direct DOD and the antitrust agencies (the Federal Trade Commission and the Department of Justice) to change the criteria they use to assess proposed mergers and acquisitions by defense firms. Congress could also create or modify programs intended to incentivize new entrants into the DIB—including small businesses and nontraditional defense suppliers—or modify the legal and policy governance of DOD contracting practices to
129 DOD, “State of Competition within the DIB,” p. 1. 130 “Stenographic Transcript—SASC Hearing,” March 22, 2022, p. 63, https://www.armed-services.senate.gov/imo/media/doc/22-15_03-22-2022.pdf.
131 “State of the Defense Industrial Base,” HASC Full Committee Hearing, February 8, 2023, video available at https://armedservices.house.gov/hearings/full-committee-hearing-state-defense-industrial-base. Comments start at 1:58:00.
132 “Stenographic Transcript—SASC Hearing,” April 26, 2022, pp. 3 and 73, https://www.armed-services.senate.gov/imo/media/doc/22-28_04-26-2022.pdf.
133 Senator Elizabeth Warren and Representatives Chris Deluzio, John Garamendi, and Mark Pocan, “Letter to Secretary Austin”, July 9, 2023, https://www.warren.senate.gov/oversight/letters/senator-warren-representatives-deluzio-pocan-garamendi-urge-dod-to-tighten-up-the-merger-review-process-and-publicly-disclose-merger-risks.
134 “State of the Defense Industrial Base,” HASC, February 8, 2023. Comments start at 2:00:00. 135 See, for instance, Maiya Clark, “Promoting Defense Industry Competition for National Security’s—Not Competition’s—Sake,” Heritage Foundation, October 19, 2022, https://www.heritage.org/defense/report/promoting-defense-industry-competition-national-securitys-not-competitions-sake.
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require or incentivize more competition for contract awards.136 Finally, Congress could consider broader changes to DOD acquisition strategies, such as encouraging the development of service-specific weapons systems over joint acquisition programs.137
Business Practices and the Role of Government
Congress may also consider the relationship between other defense industry practices and the performance of the DIB. A number of analysts and policymakers have charged that some corporations engage in behaviors—including overcharging for goods and services and underinvesting in capacity expansion—that negatively affect the public interest and undermine national security.
Overcharging, or price-gouging, occurs when companies charge customers more than fair market value for their goods or services. A lack of objective metrics can make it difficult to identify instances of overcharging. To determine whether DOD is being charged fair market value, analysts and policymakers typically examine things like profit margins, competitor pricing, and a comparison of historical price data against broader economic trends such as inflation.
A May 2023 broadcast by CBS News alleged that defense contractors had overcharged DOD for a wide array of defense equipment, potentially costing the U.S. government billions of dollars.138 DOD’s Inspector General has also found numerous instances of overcharging, including a pattern of behavior by the contractor TransDigm that the House Committee on Oversight and Accountability summarized in 2021 as “rampant price gouging on mission-critical aircraft parts.”139 Some experts have linked overcharging by defense companies to consolidation, claiming that the reduction of competition and suppliers among the DIB has reduced government leverage in negotiating contracts.140 Overcharging has also been a subject of congressional concern: in May 2023, five Senators alleged in a letter to the Secretary of Defense that some companies (including Lockheed Martin, Boeing, Raytheon, and TransDigm) had “abused the trust
136 As an example, intellectual property rights are often cited as an area of contracting with wide implications for competition; Congress may consider modifying statute or policy governing the data rights which contractors and the government respectively possess. For more information, see DOD, “State of Competition Within the DIB,” pp. 7-13.
137 Some analysts suggest that allowing the Services to procure their own versions of weapon systems—fighter jets, for example—could provide a demand-side stimulus to competition and reduce the likelihood of dominance by a single supplier. See, for instance, John Ferrari and Charles Rahr, “The Pentagon is to Blame for Industrial Base Failures,” Defense News, June 5, 2023, https://www.defensenews.com/opinion/commentary/2023/06/05/the-pentagon-is-to-blame-for-industrial-base-failures/; see also Gholz and Sapolsky, “Restructuring the Defense Industry,” pp. 50-51.
138 More specifically, CBS News cited a 2015 DOD review that “discovered Lockheed Martin and its subcontractor, Boeing, were grossly overcharging the Pentagon and U.S. allies by hundreds of millions of dollars for the Patriot's PAC-3 missiles.” It also pointed to vast increases in pricing for the same equipment over time (for instance, an individual Stinger missile, which the report claims cost $25,000 in 1991 and $400,000 in 2023) as evidence of overcharging. Bill Whitaker, “Weapons Contractors Hitting Defense Department with Inflated Prices,” 60 Minutes, CBS News, May 21, 2023, https://www.cbsnews.com/news/weapons-contractors-price-gouging-pentagon-60-minutes-transcript-2023-05-21/.
139 House Committee on Oversight and Accountability, “After Oversight Committee Inquiry, Inspector General Finds Rampant Price Gouging by TransDigm in DOD Contracts,” Press release, December 13, 2021, https://oversightdemocrats.house.gov/news/press-releases/after-oversight-committee-inquiry-inspector-general-finds-rampant-price-gouging.
140 According to the former director of DOD’s Defense Pricing and Contracting office: "In the '80s, there was intense competition amongst a number of companies. And so the government had choices…. We have limited leverage now." Whitaker, “Weapons Contractors Hitting Defense Department with Inflated Prices,” 60 Minutes.
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government has placed in them, exploiting their position as sole suppliers for certain items to increase prices far above inflation or any reasonable profit margin.”141
On the other hand, a number of defense firms and analysts have argued that not all price increases amount to overcharging. Some claim that higher prices are partly the result of increased costs for suppliers stemming from broader economic trends, such as elevated inflation and supply chain issues.142
Some analysts and policymakers claim that in addition to overcharging, defense firms tend to prioritize short-term financial returns over longer-term capital investment, internal R&D, and other capacity expansion measures, resulting in a weaker DIB and higher costs for the U.S. government. According to a 2023 contract finance study conducted by DOD:
Despite the increased profit and cash flow [experienced from 2010-2019], defense contractors chose to reduce the overall share of revenue spent on internal research and development and capital expenditures while significantly increasing the share of revenue paid to shareholders in cash dividends and share buybacks.143
For some, this trend reflects a systemic issue. One commentator has characterized the major prime contractors as “cash management machines,” more concerned with channeling profits to shareholders than improving their ability to make and deliver products.144 According to this viewpoint, such behaviors could complicate attempts to grow industrial capacity: if suppliers respond to increased cashflow by diverting ever larger percentages of revenue to shareholder remuneration, boosting government investment in the DIB may not translate effectively into capacity expansion. On the other hand, some stakeholders have argued that consistently increasing revenues will increase industry’s willingness to accept the risks and costs of funding capital investment activities.145
If Congress assesses that practices such as overcharging and insufficient capacity investment are problems that require action, a number of options are possible. Congress could consider requiring more cost and pricing data from contractors, or modifying acquisition policies and strategies to use approaches (such as progress payments) that may reduce incentives to overcharge. To encourage contractors to invest more of their own funds into capacity expansion, Congress could modify contracting policies or strategies that allow companies to bill the government for activities such as internal research and development (IR&D).
141 Senators Bernard Sanders (VT), Charles Grassley (IA), Elizabeth Warren (MA), Mike Braun (IN), and Ron Wyden (OR), “Letter to Secretary Austin,” May 24, 2023, https://www.sanders.senate.gov/wp-content/uploads/Letter-to-Secretary-Austin_5.24.2023.pdf.
142 See, for instance, Joe Gould, “Defense Industry to Launch Inflation Relief Push in Congress,” Defense News, September 1, 2022, https://www.com/pentagon/2022/09/01/defense-industry-to-launch-inflation-relief-push-in-congress/.
143 Office of the Under Secretary of Defense for Acquisition and Sustainment, “Contract Finance Study Report,” DOD, April 2023, pp. 19-20. Available at https://www.acq.osd.mil/asda/dpc/pcf/docs/finance-study/FINAL%20-%20Defense%20Contract%20Finance%20Study%20Report%204.6.23.pdf.
144 Matt Stoller, “The Military-Industrial Stock Buyback Complex,” BIG Newsletter, April 15, 2023, https://www.thebignewsletter.com/p/the-military-industrial-stock-buyback.
145 “Contract Finance Study Report,” p. 33.
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Supply Chains and Sourcing Requirements
Supply Chain Resilience
The strength and security of supply chains—the networks of processes and entities required to make and deliver products—is another defense industrial base issue that Congress may consider.146 According to DOD, the United States needs “healthy, resilient, diverse, and secure supply chains to ensure the development and sustainment of capabilities related to national security.”147 In a 2023 report, the Office of the Assistant Secretary of Defense for Sustainment summarized the issue in the following way:
Supply chain risks are not unique to the Department, but such risks take on greater urgency when considered in light of national security. For example, to keep aging weapon systems operational, [DOD] depends on a finite number of repair parts suppliers, some of which are precariously close to fiscal collapse. The proliferation of counterfeit items (particularly for microelectronics) increases the risk of mission delay or imperiled safety. Intellectual property vulnerabilities and lowered integrity of sensitive data and secure networks undermine the protections around weapon system designs. Dependence on foreign entities for critical items and cyber disruptions to the manufacturing and transportation domains likewise jeopardize mission support and success.148
Numerous observers have expressed concerns about vulnerabilities and inefficiencies within defense-critical supply chains. Some have highlighted an alleged lack of redundancy for certain kinds of equipment, arguing that dependence on a small number of private firms—or even a single source—leaves the United States highly vulnerable to supply disruption. The production of solid rocket motors, for instance, has attracted scrutiny from analysts and policymakers due to the small number of suppliers.149 Others have criticized the extent to which DOD depends upon products and materials originating from strategic competitors (i.e., China and Russia). This dependence has been alleged to be particularly acute for certain strategic and critical materials, including antimony, lithium, and rare-earth minerals.150
As part of a 2022 action plan to secure defense-critical supply chains, DOD identified four “strategic enablers” and eight “cross-cutting recommendations” (provided as Table 5 below).
Table 5. Supply Chain Enablers and Recommendations
DOD Findings from “Securing Defense-Critical Supply Chains”
Strategic Enablers
Cross-Cutting Recommendations
Workforce (Trade skil s through doctoral-level)
1. Build domestic production capacity
146 For one framework used by DOD to approach supply chain management, see “Supply Chain Management Framework,” Office of the Assistant Secretary of Defense for Sustainment, February 2023, https://www.acq.osd.mil/log/LMR/.scrm_report.html/DoD_SCRM_Framework_Report_Phase_I.pdf.
147 DOD, “Securing Defense-Critical Supply Chains,” February 2022, p. 2, https://media.defense.gov/2022/feb/24/2002944158/-1/-1/1/dod-eo-14017-report-securing-defense-critical-supply-chains.pdf.
148 “Supply Chain Management Framework,” DOD, p. iv. 149 See, for example, Doug Cameron, “Rocket Motor Shortage Curbs Weapons for Ukraine,” The Wall Street Journal, April 18, 2023, at https://www.wsj.com/articles/lockheed-martin-lmt-q1-earnings-report-2023-db3de58.
150 Bryant Harris, “The U.S. is Heavily Reliant on China and Russia for Its Ammo Supply Chain,” Defense News, June 8, 2022 at https://www.defensenews.com/congress/budget/2022/06/08/the-us-is-heavily-reliant-on-china-and-russia-for-its-ammo-supply-chain-congress-wants-to-fix-that/; and “Securing Defense-Critical Supply Chains, p. 19.
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Strategic Enablers
Cross-Cutting Recommendations
Cyber posture (Industrial security,
2. Engage with partners and allies
counterintelligence, and cybersecurity)
3. Mitigate Foreign Ownership, Control, or
Influence (FOCI) and safeguard markets
Manufacturing (Current manufacturing practices,
4. Conduct data analysis
as well as advanced technology like additive manufacturing)
5. Aggregate demand 6. Develop common standards
Small business (The role of key members of DoD supply chains)
7. Update acquisition policies
Source: DOD, “Securing Defense-Critical Supply Chains,” February 2022.
If Congress assesses that the resilience of defense supply chains is inadequate, it has a number of options. It could consider whether or not to increase use of industrial base programs, such as DPA Title III, to incentivize the expansion of existing U.S. sources or the establishment of new ones. It could also consider whether or not to expand or create partnerships with foreign suppliers to secure access to materials and products, such as certain critical minerals, that domestic suppliers are unable to provide. If Congress determines that it does not possess sufficient information regarding the condition of existing supply chains, it may also direct DOD or other entities to conduct further studies or reporting.
Onshoring and ‘Friendshoring’
Some analysts and policymakers have identified onshoring (the transfer of production activities from abroad to the United States) and ‘friendshoring’ (the transfer of production activities from adversarial or non-aligned countries to U.S. allies and partners) as potential means of strengthening supply chain resilience.151 Although both onshoring and friendshoring represent attempts to respond to supply chain and sourcing problems, they are distinct policy approaches, and actions taken in support of one approach may not align with the goals of the other.152
Advocates of onshoring defense production maintain that locating defense industrial capacity within the United States provides greater assurance that the federal government will be able to access critical materials and products during a conflict or national emergency, and may act to stimulate the domestic economy more broadly.153 Opponents criticize onshoring for its alleged potential to increase costs and exacerbate inefficiencies by requiring businesses to locate as many activities as possible within the United States, irrespective of market incentives.154
151 For a recent treatment of these topics in the U.S. media, see Sarah Kessler, “What is ‘Friendshoring’?” The New
York Times, January 3, 2023, https://www.nytimes.com/2022/11/18/business/friendshoring-jargon-business.html.
152 For example, removing domestic procurement restrictions for defense equipment from friendly countries—as supporters of friendshoring might advocate—could lead some defense production to stay (or move) outside the United States, which may not be a desirable outcome for advocates of onshoring (especially if the latter count stimulating the U.S. economy among their objectives). On the other hand, strengthening domestic procurement practices/requirements could lead to less defense production in friendly countries, which might be seen as a negative outcome by advocates of friendshoring (who may, for instance, want to see allied and partner industry strengthened, or believe DOD could realize cost savings by procuring from cheaper sources in U.S.-aligned countries). For one discussion of this distinction (as well as related concepts such as ‘nearshoring,’ see Stefan Ellerbeck, “What’s the Difference Between ‘Friendshoring’ and Other Global Trade Buzzwords?” World Economic Forum, February 7, 2023, https://www.weforum.org/agenda/2023/02/friendshoring-global-trade-buzzwords/.
153 See, for instance, Mike McCormack, “Americanize the Defense Industry Supply Chain,” National Defense, September 30, 2022, https://www.nationaldefensemagazine.org/articles/2022/9/30/americanize-the-defense-industry-supply-chain.
154 See, for example, Scott Lincicome, “Everything You Think You Know About ‘Offshoring’ Is (Probably) Wrong,” (continued...)
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Defense-specific onshoring has been the focus of a number of recent NDAA provisions, and is frequently cited as a goal by DOD officials.155 In addition, Congress and the executive branch have recently pursued several major policy and legislative initiatives intended to encourage a ‘whole-of-government’ approach to onshoring, including Executive Order 14005 of January 25, 2021 (“Ensuring the Future is Made in All of America by All of America's Workers”) and the CHIPS Act of 2022 (Division A of P.L. 117-167).156
Friendshoring is frequently identified as a tool to help accomplish the goals of multilateral security pacts such as AUKUS or NATO.157 To encourage friendshoring, DOD is reportedly expanding the scope and scale of industrial collaboration with foreign governments and companies, including the co-development and co-production of weapons systems and other defense equipment.158 Such cooperation may occur as part of institutionalized multilateral partnerships or on a narrower bilateral basis.
Domestic Content Requirements and Restrictions
Intertwined with the issues of supply chain resilience and onshoring/friendshoring are the statutory and policy authorities that apply to federal sourcing. At present, defense procurements are subject to numerous requirements intended to a) restrict the foreign sources from which the government may acquire goods and services; and b) encourage procurement from domestic sources. These requirements may be established by statute—for example, the Buy American Act of 1933 (codified at 41 U.S.C. §§8301–8305) and the Berry Amendment (10 U.S.C. §4862)—or by regulation or policy—for example, the enhanced domestic content threshold established pursuant to Executive Order 14005. Table 6 provides a summary of selected sourcing requirements relevant to the DIB.159
Lawmakers have cited numerous reasons for sourcing and content requirements, including:
• Ensuring that the United States has secure access to critical services, products,
and materials during a war or national emergency;
Cato Institute, August 9, 2023, https://www.cato.org/commentary/everything-you-think-you-know-about-offshoring-probably-wrong.
155 See Table 6 for a summary of selected NDAA provisions relating to onshoring. For DOD discussion of the issue, see, for example, David Vergun, “DOD Official Discusses Strengthening the Industrial Base,” DOD News, April 6, 2023, https://www.defense.gov/News/News-Stories/Article/Article/3354413/dod-official-discusses-strengthening-the-industrial-base/.
156 E.O. 14005 established a new Made in America Office within the Office of Management and Budget, introduced new restrictions on agency use of waivers from domestic procurement laws, and directed the Federal Acquisition Regulations Council to consider strengthening domestic procurement regulations. See E.O. 14005 of Jan 25, 2021, https://www.federalregister.gov/documents/2021/01/28/2021-02038/ensuring-the-future-is-made-in-all-of-america-by-all-of-americas-workers. The CHIPS Act of 2022 contained provisions to incentivize the domestic manufacture of semiconductors; for more information, see CRS Report R47523, Frequently Asked Questions: CHIPS Act of 2022
Provisions and Implementation.
157 See, for example, Jerry McGinn and Michael Roche, “A ‘Build Allied’ Approach to Increase Industrial Base Capacity,” Baroni Center for Government Contracting (George Mason University), June 22, 2023, https://business.gmu.edu/news/2023-06/build-allied-approach-increase-industrial-base-capacity.
158 See, for example, Doug Cameron, “U.S. Arms Makers Look Overseas to Boost Stockpiles,” The Wall Street
Journal, September 2, 2023, https://www.wsj.com/politics/national-security/u-s-arms-makers-look-overseas-to-boost-stockpiles-1e1d6eac. For more information on DOD’s international partnerships, see CRS In Focus IF12425, Defense
Primer: International Armaments Cooperation.
159 For more information on existing federal sourcing requirements, see CRS Report R46748, The Buy American Act
and Other Federal Procurement Domestic Content Restrictions.
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• Avoiding the provision of financial or material support to entities working against
U.S. interests, such as strategic competitors or terrorist organizations; and
• Supporting domestic producers and stimulating the U.S. economy.
Table 6. Selected DIB Sourcing Requirements and Restrictions
Organization(s)
Authority
Covered
Requirement/Restriction
The Buy American Act (41 U.S.C. All federal
The U.S. government must apply a price preference for
§§8301–8305); E.O. 14005; 87 FR
agencies
domestic end products and use domestic construction
12780.a
materials for covered contracts.b
Sec. 889 of the FY2019 NDAA
All executive
No executive agency may acquire telecommunications
(P.L. 115-232)
agencies
and video equipment, systems, or services produced or provided by certain foreign suppliers.c
Sec. 5949 of the FY2023 NDAA
All executive
No executive agency may acquire semiconductor
(P.L. 117-263)
agencies
products or services produced or provided by certain foreign suppliers.d
Berry Amendment (10 U.S.C.
DOD
Textiles, clothing, footwear, food, hand or measuring
§4862)
tools, stainless steel flatware, or dinnerware procured by DOD must be 100% domestic in origin.
Specialty Metals Restriction (10
DOD
DOD may not acquire certain weapons systems that
U.S.C. §4863)
contain any amount of a specialty metal not melted or
produced in the United States (as defined by 10 U.S.C. §4863).
Sensitive Materials Restriction
DOD
Sensitive materials or products containing sensitive
(10 U.S.C. §4872)
materials (as defined by 10 U.S.C. §4872) may not be sourced from Russia, Iran, the PRC, or the DPRK.
Sec. 1211 of the FY2006 NDAA
DOD
DOD may not acquire items covered by the U.S.
(P.L. 109-163), Sec. 1243 of the
Munitions List or the 600 series of the Commerce
FY2012 NDAA (P.L. 112-81), and
Control List from any Chinese military company.e
Sec. 1296 of the FY2017 NDAA (P.L. 114-328)
10 U.S.C. §2279
DOD
DOD may not contract for satellite services with certain foreign entities.
10 U.S.C. §4871(b)
DOD
DOD may not contract with a firm owned or control ed by a state sponsor of terrorism.
Sec. 855 of the FY2023 NDAA
DOD
DOD may not procure goods mined, produced, or
(P.L. 117-263)
manufactured by forced labor from China’s Xinjiang Uyghur Autonomous Region.
Kissell Amendment (6 U.S.C.
DHS
Textiles, clothing, or footwear procured for national
§453b)
security purposes by DHS must be 100% domestic in origin.
Source: CRS analysis of relevant statutory and regulatory provisions. Notes: Exceptions to the domestic content restrictions of the Buy American Act, the Berry and Kissell Amendments, and the Specialty Metals and Sensitive Materials Restrictions are possible under certain circumstances (e.g., the Trade Agreements Act of 1979 allows the President to waive restrictions on eligible items, and procuring agencies may waive restrictions under certain circumstances). See CRS products on these statutory restrictions for more information. a. General ‘Buy American’ requirements are statutorily established (41 U.S.C. §§8301–8305), but the threshold
for goods to qualify and other specific implementation requirements have been set by a rule (RIN 9000-
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AO22, published at 87 Federal Register 12780, March 7, 2022) implementing an Executive Order (E.O. 14005).
b. For a good to qualify as a domestic end product, a certain proportion of its value must be mined, produced,
or manufactured in the United States. For products consisting mainly or whol y of steel and/or iron, this threshold is 95%; for non-steel/iron manufactured products, this threshold is 60% (unless it is a commercially available off-the-shelf item); and non-steel/iron unmanufactured products must be mined or produced in the United States. The content threshold for non-steel/iron manufactured products is scheduled to increase to 65% in 2024 and 75% in 2029.
c. Including Huawei or ZTE. d. Including Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, or
Yangtze Memory Technologies Corporation.
e. Defined at 50 U.S.C. §1701.
There is considerable variance as to which sources may be considered domestic. The National Technology and Industrial Base (NTIB), for instance, is defined as “the persons and organizations that are engaged in research, development, production, integration, services, or information technology activities conducted within the United States, the United Kingdom of Great Britain and Northern Ireland, Australia, New Zealand, and Canada.”160 Such persons and organizations receive preference for certain limited procurement actions and some NTIB entities may be exempted from certain Foreign Ownership, Control or Influence (FOCI) requirements.161 However, for the purposes of other requirements—such as those created by the Buy American Act—sources must be located within the United States to qualify as domestic.
Congress may consider the extent to which these content requirements suffice to meet its goals regarding the DIB. If it determines that further preferences are necessary to encourage procurement from U.S.-based suppliers, it may, for instance, consider raising the threshold required for a product to qualify as American for the purposes of the Buy American Act, or implement additional restrictions covering specific products or materials. If Congress assesses that current requirements are excessively restrictive, it may consider actions such as lowering domestic content thresholds or expanding the membership of the NTIB. If procurement—whether by the government or by prime contractors—from particular entities, countries, or regions of concern is determined to be an issue, Congress may also consider passing restrictions that specifically apply to those sources.
Author Information
Luke A. Nicastro
Analyst in U.S. Defense Infrastructure Policy
160 10 U.S.C. §4801. 161 Procurement of conventional ammunition can be restricted to NTIB sources and must be from the NTIB in certain circumstances (10 U.S.C. Ch. 223 note proceeding); fire-resistant rayon fiber in uniforms may only be procured from a non-NTIB member if NTIB sources are not available (10 U.S.C. §4862 (note)); and buses, chemical weapons antidotes, ball and roller bearings, satellite “star trackers,” and certain components for naval vessels may only be procured from NTIB manufacturers, unless the Secretary of Defense waives this restriction (10 U.S.C. §4864). For more information, see CRS In Focus IF11311, Defense Primer: The National Technology and Industrial Base.
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Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
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