Defense Department's Globalization of Supply Chain Threatens our National Security

Over three years ago, I wrote an article about the release of the Senate Armed Services Committee report on counterfeit parts in the Department of Defense supply chain. The committee had found over 1,800 cases of counterfeit parts in just the Air Force C-130J and C-27J cargo plane, as well as assemblies used in the Navy's SH-60B helicopter.

To address weaknesses in the defense supply chain and to promote the adoption of aggressive counterfeit avoidance practices by the Department of Defense and the defense industry, an amendment to the National Defense Authorization Act for Fiscal Year 2012 was adopted in the Senate and signed by President Obama.

Instead of implementing the requirements of the act, it appears that DOD "has entered a new phase of its centuries-long development, the latest characterized by globalization of supply chains and the inability of U.S. defense contractors and laboratories to drive technological change" according to Richard McCormack, publisher and producer of the Manufacturing & Technology News, May 20, 2015 edition.

In this issue, McCormack reported on comments made by Bill Lynn, CEO of Finmeccanica North America and former Deputy Secretary of Defense from 2009 until 2011, at the April 29, 2015 meeting of the Center for Strategic and International Studies in Washington, D.C.

The defense sector and the U.S. military have “moved from being a net exporter of technology to a net importer,” Lynn stated, adding “When their R&D budgets are combined to total a scant $3 billion (or only 1.6% of revenue), the five biggest defense contractors -- Boeing, Lockheed, Raytheon, L3 and Northrop -- would not even make the list of the top 20 global companies that invest in R&D.”

Lynn told the meeting, “Those are things where the commercial industrial base is stronger than the defense industrial base and in many ways the key to maintaining our future [defense] technology edge is to be able to import those technologies into our defense industrial base... Since many of the underlying technologies now reside outside of the United States, DOD has to figure out how to deal with foreign corporations and state-owned enterprises that hold the keys to its success.”

When President Eisenhower warned us about the military-industrial complex, little did he know that the military-industrial would be superseded by the consumer-importer complex, which has led to the virtual demise of the military-industrial complex."

 

McCormack noted, “The Department of Defense and its major contractors are now dependent on foreign manufacturers for many of the military's most advanced weapons systems…The defense industry is a shadow of its former self, representing less than 3.5% of the U.S. economy, a position that continues to decline as defense budgets reach new lows with no chance of them growing faster than the economy.”

Lynn commented that “DOD is slowly catching up to the structural change caused by globalization of technology and supply chains. It is wrestling with the regulatory and procurement systems it has in place to monitor and conduct business with foreign suppliers, but it has little time to waste.”

One of the regulations to which he referred is the Buy American Act that was passed by Congress in 1933. It required the U.S. government to give preferential treatment to American producers in awarding of federal contracts. The act restricted the purchase of supplies that are not domestic end products. For manufactured products, the Buy American Act used a two-part test: first, the article must be manufactured in the U.S., and second, the cost of domestic components must exceed 50% of the cost of all its components.

After the end of the Cold War and the subsequent Gulf War, the provisions of the “Buy American Act” were eased to allow purchasing off-the-shelf commercial parts (COTS) from foreign countries by the Defense Department and other government agencies if they met the same fit and function of parts made to strict military specifications. Previously, parts, assemblies and systems were required to be substantially made in the United States or in a NATO country, such as Great Britain, France and Germany.

In the early 1990s, most commercial parts were still being made in the United States, with some outsourcing to the Philippines, Hong Kong and Singapore, so this change was pretty safe. Permitting commercial parts to replace Mil. Spec. parts probably drove out of business the small companies that catered exclusively to the military and that provided traceability per military specifications for parts supplied to government agencies, military contractors and subcontractors. This was all done in the name of cost savings. Now, however, most commercial electronic components and microchips are fabricated in China.

The president has authority to waive the act in response to the provision of reciprocal treatment to U.S. producers. Under the 1979 GATT Agreement on Government Procurement, the U.S.-Israel Free Trade Agreement, the U.S.-Canada Free Trade Agreement, the North American Free Trade Agreement, the Central American Free Trade Agreement and the Korea Free Trade Agreement, access to government procurement by certain U.S. agencies of goods from the other parties to these agreements is granted.

If the Trans-Pacific Partnership Agreement is approved, the procurement chapter would require that all companies operating in any country signing the agreement be provided access equal to domestic firms to U.S. government procurement contracts over a certain dollar threshold. To meet this requirement, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in the 10 other countries.

In fact, it was reported by Reuters in January 2014 that “The Pentagon repeatedly waived laws banning Chinese-built components on U.S. weapons in order to keep the $392 billion Lockheed Martin Corp. F-35 fighter program on track in 2012 and 2013, even as U.S. officials were voicing concern about China's espionage and military buildup.”

Lynn doesn't seem to think that there is anything dangerous in allowing more foreign participation in the defense industry, saying “that changing perceptions about foreign involvement in the defense industry are similar to what happened in the U. S. auto sector...Americans and their representatives in Congress were skeptical about foreign nameplates. But as foreign auto companies started building technologies in the United States and hiring American workers, the tide turned…The politicians care about the jobs, they care less about the nameplate.”

It is incomprehensible to me to compare what happened to the U. S. auto industry to what is happening to the U. S. defense industry. The whole purpose of the defense industry is to protect our national sovereignty and national security. How can anyone in their right mind want to make our defense supply chain vulnerable to the foreign country, namely China, which has a written plan to replace us as the world's superpower? The Chinese are never going to build plants in the U. S. to make parts for our defense supply chain. They have just stolen our technology to build up their own military power as evidenced by the "uncanny" similarity of China’s newest stealth fighter, the J-31, as well as the Chengdu J-20 fighter jet, to the F-35 Lightning II advanced fighter jet.

Does anyone believe that we will get any parts and assemblies need by our defense industry when China has decided we are so weak that we cannot stop their aggression in Asia. We are not even safe to have parts sourced in Taiwan, South Korea, the Philippines, Malaysia, Indonesia or Vietnam. These countries would all be targets for takeover by China once they lose their fear and respect for U. S. naval and air power.

When President Eisenhower warned us about the military-industrial complex, little did he know that the military-industrial would be superseded by the consumer-importer complex, which has led to the virtual demise of the military-industrial complex.

Congress must act to strengthen the Buy American Act, not weaken it, eliminate the incentives for offshoring, and provide incentives for bringing manufacturing back to America. We must protect the supply chain for defense and military products and systems, so that Defense Department can fulfill its primary mission of defending our country. If we don't, we are setting ourselves up for eventual defeat by our future enemies.