[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
[H.A.S.C. No. 118-3]
STATE OF THE DEFENSE INDUSTRIAL BASE
__________
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
FEBRUARY 8, 2023
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
51-705 WASHINGTON : 2023
COMMITTEE ON ARMED SERVICES
One Hundred Eighteenth Congress
MIKE ROGERS, Alabama, Chairman
JOE WILSON, South Carolina ADAM SMITH, Washington
MICHAEL R. TURNER, Ohio JOE COURTNEY, Connecticut
DOUG LAMBORN, Colorado JOHN GARAMENDI, California
ROBERT J. WITTMAN, Virginia, Vice DONALD NORCROSS, New Jersey
Chair RUBEN GALLEGO, Arizona
AUSTIN SCOTT, Georgia SETH MOULTON, Massachusetts
SAM GRAVES, Missouri SALUD O. CARBAJAL, California
ELISE M. STEFANIK, New York RO KHANNA, California
SCOTT DesJARLAIS, Tennessee WILLIAM R. KEATING, Massachusetts
TRENT KELLY, Mississippi ANDY KIM, New Jersey
MIKE GALLAGHER, Wisconsin CHRISSY HOULAHAN, Pennsylvania
MATT GAETZ, Florida JASON CROW, Colorado
DON BACON, Nebraska ELISSA SLOTKIN, Michigan
JIM BANKS, Indiana MIKIE SHERRILL, New Jersey
JACK BERGMAN, Michigan VERONICA ESCOBAR, Texas
MICHAEL WALTZ, Florida JARED F. GOLDEN, Maine
MIKE JOHNSON, Louisiana SARA JACOBS, California
LISA C. McCLAIN, Michigan MARILYN STRICKLAND, Washington
RONNY JACKSON, Texas PATRICK RYAN, New York
PAT FALLON, Texas JEFF JACKSON, North Carolina
CARLOS A. GIMENEZ, Florida GABE VASQUEZ, New Mexico
NANCY MACE, South Carolina CHRISTOPHER R. DELUZIO,
BRAD FINSTAD, Minnesota Pennsylvania
DALE W. STRONG, Alabama JILL N. TOKUDA, Hawaii
MORGAN LUTTRELL, Texas DONALD G. DAVIS, North Carolina
JENNIFER A. KIGGANS, Virginia TERRI A. SEWELL, Alabama
NICK LaLOTA, New York STEVEN HORSFORD, Nevada
JAMES C. MOYLAN, Guam JIMMY PANETTA, California
MARK ALFORD, Missouri Vacancy
CORY MILLS, Florida
RICHARD McCORMICK, Georgia
Chris Vieson, Staff Director
Ian Bennitt, Professional Staff Member
Phil MacNaughton, Professional Staff Member
Owen McGeary, Research Assistant
C O N T E N T S
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Page
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Rogers, Hon. Mike, a Representative from Alabama, Chairman,
Committee on Armed Services.................................... 1
Smith, Hon. Adam, a Representative from Washington, Ranking
Member, Committee on Armed Services............................ 2
WITNESSES
Fanning, Hon. Eric, President and Chief Executive Officer,
Aerospace Industries Association............................... 4
Norquist, Hon. David L., President and Chief Executive Officer,
National Defense Industrial Association........................ 6
Paxton, Matthew O., President, Shipbuilders Council of America... 7
APPENDIX
Prepared Statements:
Fanning, Hon. Eric........................................... 59
Norquist, Hon. David L....................................... 74
Paxton, Matthew O............................................ 84
Documents Submitted for the Record:
NDIA Report, ``Vital Signs 2023: Posturing the U.S. Defense
Industrial Base for Great Power Competition''.............. 101
Witness Responses to Questions Asked During the Hearing:
Mr. Rogers................................................... 127
Mr. Waltz.................................................... 128
Questions Submitted by Members Post Hearing:
Mr. Bergman.................................................. 139
Mr. Gallagher................................................ 136
Mr. Horsford................................................. 143
Mr. Johnson.................................................. 143
Mr. Wilson................................................... 133
STATE OF THE DEFENSE INDUSTRIAL BASE
----------
House of Representatives,
Committee on Armed Services,
Washington, DC, Wednesday, February 8, 2023.
The committee met, pursuant to call, at 11:00 a.m., in room
2118, Rayburn House Office Building, Hon. Mike Rogers (chairman
of the committee) presiding.
OPENING STATEMENT OF HON. MIKE ROGERS, A REPRESENTATIVE FROM
ALABAMA, CHAIRMAN, COMMITTEE ON ARMED SERVICES
The Chairman. The committee will come to order.
Yesterday we held our first briefing on the threats posed
by the Chinese Communist Party. We reviewed the threats and
actions our military should take to ensure success in any
future conflict.
Today we are examining the state of the defense industrial
base and how we can best position it to fully support our
military if, in fact, a conflict breaks out.
For over 200 years we have relied on the skills of the men
and women working in shipyards and factories throughout America
to build the tools our warfighters need to succeed in battle.
We cannot prevail in any conflict without a ready, strong, and
adaptable industrial base.
Yet, the industrial base is experiencing a multitude of
challenges. Some of these include inflation, workforce
shortages, bureaucratic hurdles, and supply chains that remain
too dependent on foreign sources for materials.
Inflation continues to wreak havoc on the cost of
materials, driving up the costs for suppliers and small
manufacturers who are hemmed in by fixed price contracts.
Making matters worse, the administration refuses to use the
authorities and resources Congress gave them last year to
provide the necessary relief.
Recruiting and retaining a skilled workforce was a problem
before COVID [coronavirus disease] and it's only gotten worse.
Bureaucratic contracting hurdles continue to slow things down
and compound our ability to scale when needed.
They also continue to present barriers for new entrants
into the defense industrial base, which we need to advance
innovation. We took steps to overcome some of these hurdles in
last year's NDAA [National Defense Authorization Act] but I am
confident that more must be done.
Exacerbating these challenges is our important and
necessary work to resupply Ukraine. That effort has laid bare
many of our vulnerabilities, especially with respect to our
ability to rapidly produce and field munitions.
But the greatest concern I have with the defense industrial
base is our continued reliance on China as the source of raw
materials. The Chinese Communist Party maintains a tight grip
on many of our material supply chains, including critical
minerals and semiconductors.
We will never prevail in a conflict with China if they're
the source of our military supply. While we have made some
progress in recent years, I won't stop until we've completely
rid the defense supply chain of Chinese goods and materials.
I look forward to hearing from our witnesses about what
resources and authorities are needed to help revitalize the
defense industrial base and position it best to support our
warfighters.
And with that, I yield to my friend, the ranking member,
Mr. Smith.
STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON,
RANKING MEMBER, COMMITTEE ON ARMED SERVICES
Mr. Smith. Thank you, Mr. Chairman.
This is an incredibly important hearing. I want to thank
our witnesses for being here. We have got an outstanding panel
with considerable background on this issue.
The industrial base, you know, is a growing challenge,
something that, as the chairman mentioned, we were certainly
aware of before COVID and before the war in Ukraine. But those
two issues have brought it into sharp focus.
In both instances we suddenly found ourselves in desperate
need of a lot more of certain--you know, certain production
items and we looked around for how to create them and
discovered that we did not have the surge capacity that we
wanted, and we don't have the sustainable industrial base that
we want to meet our needs in a variety of areas.
But, obviously, in the Armed Services Committee what we're
focused on is meeting our needs in national security. And,
again, we have a huge challenge and we're seeing that now play
out in our effort to make sure we have enough munitions, basic
ammunition, artillery, to meet the fighting requirements that
are going on in Ukraine.
And we have learned, again, that we don't quite have that
surge capacity. I remember hearing a lot of people when we
would talk about the need for this say, well, you know, when
the problem comes, we'll have surge capacity. That sounds
great, okay. But we have come to find out it's really difficult
to just sort of snap your fingers and all of a sudden create
surge capacity.
We have heard consistently from our industrial partners
that they are not going to build a level of manufacturing
capability necessary to produce stuff if they don't know that
someone's going to buy it.
This is what is--you know, the cliche now has become we
need a demand signal, which basically means we need the
government to promise us that they will pay us one way or
another before we will make the investments to be able to make
things quicker and faster.
So, we need to figure that out. What do we really need in
the industrial base? We are not going to be able to prepare for
every conceivable contingency. We just don't have the resources
and the private sector will not make that investment on a wish
and a promise as to whether or not they will ever recoup that
investment.
So, we need to be really strategic about it. What do we
need, what are the most important things that we need to
produce more of, and how do we do it. And we could not have
three better people to help explain to us what those things
are.
And then the other issue is the one that the chairman
mentioned directly and that is our reliance on China. Starting,
roughly, in the late 1990s into the early 2000s, China became
the global corporate easy button. You know, that's where you
went to make stuff. Huge market. You know, no--not much in the
way of labor costs, certainly no environmental regulations. It
was cheap. It was easy. It was the place to go.
Now we are beginning to diversify and in a bipartisan way
on this committee, in the Trump administration, in the Biden
administration. A number of proposals have been made to stop
our reliance on China and to begin to diversify that market.
One key aspect of that is, yes, a lot of it will be done in
the U.S. There's no way that the United States of America can
meet this challenge on its own, and I know people don't like
hearing that. You know, we're America. We'll make everything
here. We will be independent. That's not the way the global
economy works.
We need to increase our capacity, absolutely. But we also
need to work with trusted partners. That's why things like the
AUKUS [Australia, United Kingdom, United States] agreement are
so important. Who are those trusted partners.
Yes, we would rather make it all here. But the thing that
we really need is to make sure that it's not all made in China
so how do we find those partners in order to build up that
capacity of them, going forward.
And the last point I will make is when we look at that
industrial base the real problem is, as the chairman mentioned,
on innovation and on some of these smaller companies.
I have nothing against large prime contractors. They
perform an incredibly important task for us. They have
flexibility in a variety of different ways. There are so many
capabilities on the smaller end that we are dependent upon
small companies all across this country that don't have that
flexibility and when they disappear, we got nowhere to go.
So, I'm really curious to hear how we get those sort of
smaller tier manufacturers, going forward, and I guess I will
make one other comment on precious earth minerals--rare earth
and precious minerals.
We really need to build the capacity to process those
things. We can actually find them in a bunch of different
places. It's the processing that is almost all done in China.
What are we going to do to fix that?
So, I look forward to this hearing. I think it's an
incredibly important topic. I thank the chairman for having it
and with that, I yield back.
The Chairman. I thank the ranking member, and I do hope the
witnesses will pick up especially on that last point and help
us understand how we can scratch that itch.
I'd like to introduce our witnesses now. We have a very
distinguished panel.
The Honorable Eric Fanning is the current president and CEO
[chief executive officer] of Aerospace Industries Association.
He served as the 22d Secretary of the Army and various other
senior roles in his 25 years of government service.
The Honorable David Norquist is the president and CEO of
the National Defense Industrial Association. Mr. Norquist
previously served as the 34th Deputy Secretary of Defense from
2019 to 2021.
And Matt Paxton is the president of the Shipbuilders
Council of America, a role which he assumed in 2007 after a
very distinguished career as a senior advisor in the Senate.
There's not a lot of work to do over there as they don't
ever do anything. So, what were you advising them on?
[Laughter.]
The Chairman. Just joking. I welcome our witnesses and
we'll start with Mr. Fanning.
STATEMENT OF HON. ERIC FANNING, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AEROSPACE INDUSTRIES ASSOCIATION
Mr. Fanning. Good morning, Chairman Rogers, Ranking Member
Smith, and members of the committee. Thank you for inviting me
to discuss the state of the defense industrial base.
The defense industrial base--the DIB--is the Department of
Defense's most important partner in equipping and protecting
our warfighters and defending our country.
To fulfill this vital role the companies that make up the
DIB rely on clear demand signals from Congress as well as
sufficient Federal investment, a regulatory environment that
allows us to innovate and to move at the speed of relevance,
and a healthy and resilient supply chain.
Recently, a confluence of challenges including a global
pandemic, through which we never stopped working, record
inflation, workforce challenges, and supply chain disruptions,
to name a few, has put significant pressure on our industry.
Simultaneously, demand is increasing due to a major ground
war in Europe with Russia's invasion of Ukraine almost 1 year
ago, and the looming threat from China.
All of this combined has many wondering about the health of
the DIB. To best answer this question, it's crucial to
understand our industry. The contours of the national security
industrial base and its ability to respond to these challenges
are shaped by a single customer, the Federal Government. That
is an important distinction from the commercial marketplace and
one that has an outsized impact on its products, people, and
performance.
Federal investments help ensure the overall health of the
industry. That means that the number of programs prescribed by
the Pentagon has a direct correlation to the shape of the
industry.
Competition within the industry ecosystem is driven by
identifying something for which to compete. Companies react
accordingly. A good example of programs with many competitors
is UAVs [unmanned aerial vehicles]. There are hundreds of
programs and, hence, a multitude of competitors.
And our industrial base is not monolithic. It is a diverse
ecosystem with companies of all sizes, each with its own role
to play. While small companies can be innovative incubators by
virtue of their size and ability to speed decisions, prime
contractors bring scalability, capability, and cash flow, as
well as a large talent pool with extensive experience. Large
primes can also afford to maintain a workforce in ready state
to meet evolving needs.
The condition of the industry today is not the result of
Russia's invasion of Ukraine but of successive decisions made
over many years. Federal policy and investment in our national
defense can be summed up in two words: unpredictable and
inconsistent.
Over the last 25 years, Congress has passed more than 120
continuing resolutions instead of on-time appropriations bills.
In addition, we are still digging out from the effects of
sequestration a decade ago.
I saw some of these effects firsthand during my time at the
Pentagon, but others have taken years to manifest and could
take years to unwind without a sense of urgency.
One result of these many years of successive decisions is
an industrial base maximized to meet peacetime needs. This
means excess capacity for surging is not always built into the
system. We are optimized for efficiency. With the potential of
conflict on the horizon we must consider how we resource and
support the capacity and resilience of the defense industrial
base.
Both Congress and DOD [Department of Defense] have a role
to play. Sufficient funding comes first. This committee's
leadership is evident in recent NDAAs. The growing bipartisan,
bicameral support for increased funding in recent years has
been an important signal to industry.
But it's also critical that this funding is on time and
predictable. Businesses need far more flexibility. The
Department must empower its workforce to move beyond a
compliance culture to one that exercises existing flexibility.
For example, contract flexibility to address sky-high inflation
was a welcome step but short term in scope. Other key tools
like progress payments ensure businesses have stable cash flow.
And the cost of compliance for businesses has skyrocketed.
How can we make it easier for businesses of all sizes to
support national security? What existing regulations and
policies are working as intended and which are causing more
harm than good?
Taking additional steps to accelerate innovation and
address harmful policies like R&D [research and development]
tax amortization will help the U.S. military meet the threats
posed by a modernizing Chinese military.
At the heart of everything is the workforce. We need
policies and support to maintain this workforce, both skilled
labor and degreed STEM [science, technology, engineering, and
mathematics] workers. Every American should know they have a
place in the aerospace and defense industry.
Several top Pentagon leaders acknowledge that the
Department doesn't make it easy to do business with them. Even
the Pentagon's reports on competition in small business largely
highlight the barriers faced by companies wanting to be a part
of our Nation's security.
Chairman Rogers, Ranking Member Smith, and members of the
committee, we are grateful for the time you have taken to visit
our members and hear from us firsthand. I extend an invitation
to anyone here or at the Pentagon to do the same.
Industry is a partner, not an adversary. Let's work
together to meet the moment. I've included a number of
recommendations in my written testimony.
On behalf of the Aerospace Industries Association, I want
to again thank the committee for prioritizing this critical
issue, and I look forward to your questions.
[The prepared statement of Mr. Fanning can be found in the
Appendix on page 59.]
The Chairman. Thank you, Mr. Fanning.
Mr. Norquist, you are recognized.
STATEMENT OF HON. DAVID L. NORQUIST, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL DEFENSE INDUSTRIAL ASSOCIATION
Mr. Norquist. Thank you.
Chairman Rogers, Ranking Member Smith, and distinguished
members of the committee, thank you for the opportunity to
speak with you today on the state of the defense industrial
base and its essential role in national security.
I will limit myself to brief opening remarks and with the
Chair's permission submit for the record NDIA's ``Vital Signs
2023'' report.
[The information referred to can be found in the Appendix
on page 101.]
Mr. Norquist. For over 100 years, the National Defense
Industrial Association has worked to improve collaboration
between industry and government so our Nation's security can
fully harness the benefits of our innovative industrial base.
As a trade association, NDIA represents over 1,800 defense
companies of all sizes and all sectors, and the majority of our
members are small businesses. The defense industrial base is
critical to our national security. Its people develop, produce,
maintain, and repair the platforms, equipment, supplies, and
advanced technologies our warfighters need.
They're the welders, engineers, programmers, scientists,
analysts, and technicians who respond to our Nation's call to
maintain our military and to build the future force.
Today there is a mismatch between what our national
strategies aim to achieve and how our defense industrial base
is postured. Both the 2018 and the 2022 National Defense
Strategies highlight the return of great power competition, and
the 2022 National Security Strategy states, quote, ``the post-
Cold War era is definitely over and a competition is underway
between the major powers to shape what comes next.''
However, key industrial readiness indicators for great
power competition are going in the wrong direction. For
example, we should expect the number of workers in the defense
industrial base to be increasing. In 1985, the U.S. had 3
million workers in the defense industry. In 2021, there were
1.1 million workers in the sector and that number is remaining
flat.
We should expect the number of companies in the defense
industrial base to be increasing but analysis shows that over
the last 5 years a net 17,000 companies have left the defense
industrial base.
In particular, the Department of Defense recently estimated
the number of small businesses participating in the defense
industrial base has declined over 40 percent in the last
decade.
From 1985 to 2021, funding for national defense decreased
from 5.8 to 3.2 percent of U.S. GDP [gross domestic product]
and the Congressional Budget Office projects a further decline
to 2.7 percent by 2032.
In addition, in 13 of the last 14 years we have had long
continuing resolutions that specifically prevent new starts or
increased production rates. These trends are not consistent
with creating the defense industrial base required for great
power competition.
But the current state of the defense industrial base is not
an accident. It developed in response to government policy and
funding. To produce resilience in the defense industrial base
the government must value it in budgeting and in its
contracting processes.
This would be--include encouraging vendors to use multiple
suppliers, having more parts in stock, and building surge
capacity. This can be done through contracts as well as
supported by Congress via multiyear authority and advanced
procurement.
We should also make it easier for firms to do business with
the government, particularly small businesses and those
nontraditional industries who cannot afford the many regulatory
barriers to entry, the long contracting timelines, and the
disruptive uncertainty with annual appropriations.
The return of great power competition places greater
demands on America's defense industrial base. A brittle
industrial base is a strategic vulnerability. A resilient
defense industrial base is a powerful deterrent.
I appreciate the committee's wisdom in prioritizing this
critical issue. Thank you for the opportunity to testify today
and happy to answer any questions you may have.
[The prepared statement of Mr. Norquist can be found in the
Appendix on page 74.]
The Chairman. Thank you, Mr. Norquist.
Mr. Paxton.
STATEMENT OF MATTHEW PAXTON, PRESIDENT, SHIPBUILDERS COUNCIL OF
AMERICA
Mr. Paxton. Yes, thank you, and on behalf of the
Shipbuilders Council of America I'd like to thank Chairman
Rogers, Ranking Member Smith, and members of the House Armed
Services Committee for the opportunity to provide the shipyard
industrial perspective on the state of the industrial base.
The U.S. shipyard industry is a diverse and critical
manufacturing sector of our Nation's economy. A recent study by
the Maritime Administration found that the industry supports
nearly 400,000 direct and indirect jobs touching all 50 States
and contributes $42.2 billion annually to GDP.
Shipyards are engaged in building, maintaining,
modernizing, and repairing vessels of all sizes for the U.S.
Navy, Coast Guard, Army, NOAA [National Oceanic and Atmospheric
Administration], the Maritime Administration, local and State
governments, and the 40,000 commercial vessels that operate in
domestic commerce.
Additionally, there's a vast supplier base that provides
goods and services that support all facets of domestic
shipbuilding and ship repair.
Our shipyard manufacturing sector is truly a national asset
and one that is not immune to the many recent historic
challenges that adversely impacted global supply chains, access
to critical markets, materials, COVID impacts on the workforce,
record inflation, and a fundamentally changing marketplace.
In spite of these challenges, the U.S. shipyard industry
showed its capacity to implement rapid protocols to keep the
workforce safe while navigating an ever-evolving global
pandemic.
As a designated critical infrastructure industry, your
American shipyards never shut down and shipyard employees cut
steel to build, repair, maintain, and modernize our ships
throughout the pandemic.
Indeed, in the height of the pandemic in 2020 the shipyard
industry delivered 10 ships to the Navy and maintained and
modernized many more. I believe this is a testament to the
culture of safety found in our shipyards that predated the
pandemic.
Unfortunately, over the last several years the industry has
also experienced unpredictable budgets, a volatile acquisition
environment with repeated shifts in fleet size and mix that
made CAPEX [capital expenditure] and facility investment
decisions more difficult.
Moreover, once the people are lost as production lines are
stopped and started, they're more difficult to replace. The
most effective mechanism to ensure the industrial base is
stable and resilient is through a consistent upward and
adequately funded demand signal.
Let me state up front: The shipyard industrial base has
made and will continue to make considerable investments in its
workforce to hire and train the next generation of skilled
craftsmen and women.
In addition, the private shipyard industry has made
substantial investments in new capital infrastructure,
including dry docks, to meet the demands of the Navy's new
construction and ship repair plans.
Private shipyards require a predictable workload and a
volume of work to support recapitalization of equipment, to
keep rates low, and to train and retain a sustainable
workforce.
In addition to funding the construction of Navy vessels,
there must be a similar commitment to fund the tail, the
maintenance of the current ships entering the fleet to ensure
they reach their expected service lives.
Much like shipbuilding, ship repair and modernization would
benefit from the use of acquisition strategies that promote
private sector investment in people and infrastructure,
increases the volume of work at existing private shipyards, and
promotes the speed of execution to meet the unique challenges
of the maintenance and modernization environments.
It is not possible to get to the legally mandated 355 fleet
size if the services do not adequately budget to maintain the
ships that we do have and that are being commissioned over the
next few years for the duration of their service lives.
SCA [Shipbuilders Council of America] applauds the work of
this committee in the fiscal year 2023 NDAA to prevent the
decommissioning of 24 additional ships and to restore some
predictability to maintenance schedules.
Regardless of this assessment, the private shipyard
industry and the associated critical supply chain remain
committed partners in building, maintaining, and modernizing
the most capable and advanced Navy for the Nation and our
dedicated service men and women.
Thank you again for the opportunity to provide the shipyard
industry perspectives on the state of the industrial base, and
I look forward to your questions.
[The prepared statement of Mr. Paxton can be found in the
Appendix on page 84.]
The Chairman. Thank you, Mr. Paxton, and thank all the
witnesses, and I now recognize myself for questions.
Mr. Norquist, you mentioned in your statement the number of
companies that have left the industrial base and I'm
particularly concerned about those who focus on munitions and
rocket motor providers.
How do we bring those people back in or get--make it
inviting for these kind of companies, particularly small
companies, to participate in the industrial base?
Mr. Norquist. So when you look at how particularly the
smaller companies operate, they have a much lower ability to
tolerate gaps between when they have--when there's a
requirement and their ability to deliver so things that shorten
those timelines so they can ramp up and have expectations.
One of the things the committee did recently that's very
helpful is multiyear contracts, right. If you're a business and
you're going to ramp up and increase the size of your facility
and you're going to hire people, you want to be able to promise
those people not you have a job until the next appropriation
and authorization bill is enacted and then we'll see, but we
have got it for 4 years and we can invest in the facility. So
that level of predictability and when that can be provided is a
huge help.
The other thing to look at is the number of times we
introduce a rule or regulation on government contractors that
are not common in the private sector. This is most disruptive
to a firm that has one foot in each and starts getting
frustrated with all the additional requirements.
Many of them well intentioned, many of them important. But
when you look at the cumulative effect that firm decides it's
easier to move out. The most, you know, recent example, and
it's a side effect of our business, is inflation. When the
inflation hit and small businesses in the private sector could
change their prices tomorrow, a woman-owned small business I
was talking to they're locked into their salaries for 5 years
with the government. So, she's going to watch her staff leave.
So those are a couple of examples, sir.
The Chairman. Great.
Mr. Fanning, you heard the ranking member mention this
concern about China's control of minerals and many materials
that we need in our supply chain. Do you--does that worry you
and, if so, what do you recommend that we do about that
concern?
Mr. Fanning. It does worry me, Mr. Chairman, and it worries
the members as well.
I'd point out that it took us years to get to where we are
built on different policies with China, and as we pivot and try
and extricate ourselves, particularly on the national security
side, it's going to take time, shared effort, and a sense of
urgency.
We largely source from friends anyhow, as it is right now.
Our largest exporters in the defense world are our largest
importers as well--China, Canada--I'm sorry, Japan, Canada, the
U.K. [United Kingdom], Germany, and France.
So, it's really just down to those minerals, but that's
still a concern of ours, and as the ranking member pointed out
a big part of that is processing. We know where to get the
minerals, but the processing of it is a difficult, expensive
process that has [inaudible] impacts.
The Chairman. Why? What could we do to make it easier? Less
difficult?
Mr. Fanning. Well, I think this is--one of my suggestions
would be that we change the name of the office in the Pentagon
on defense industrial policy to something else because that has
negative connotations, and I think when you look at it from the
lens of national security, there is an important aspect for us
to work together, government and industry, and figure out what
each needs to do.
In this particular case, I think investment on the part of
government to get that started, to get that market, that
capability, started so that the industry side then has a source
and can turn to it and support it would be critically important
because we have lost that capability.
The Chairman. Mr. Paxton, why is it important to receive
more consistent demand signal from the Navy regarding its
shipbuilding and repair plans?
Mr. Paxton. Yeah. Mr. Chairman, I think most people
understand in this room that shipyards and ship repair
facilities are highly intensive capital enterprises.
So, a lot of long-term investments are made in our
shipyards and our facilities but also a lot of our shipyards
employ thousands and thousands of employees. So, there's a
dedicated aspect of investing in our workforce as well.
Look, if we get a new shipbuilding plan every year for 11
years it sends a confusing message to industry. So, to the
extent that we can have stable budgets--we got through
sequestration and the Budget Control Act--to the extent that we
have stable budgets and a stable demand signal--I know this has
come up a few times this morning--industry will respond
accordingly. They have in the past.
So, I think industry makes those investments and they want
that stable market in front of them.
Lastly, I'll say--this committee has done this--acquisition
strategies like incremental funding, advanced procurement,
block buy contracting, those are huge for shipyards because
that gives it the long lead time materials that we need to
sequence ships, to have that stuff come in. Whereas some of the
materials we're buying it was only 18 months to get. Now it's 2
to 3 years to get. So, it's really critical, sir. Thank you.
The Chairman. Thank you.
The Chair now yields to Mr. Courtney.
Mr. Courtney. Thank you, Mr. Chairman, for scheduling this
important hearing right at the outset of this Congress, which I
think sends a strong message that--as an article that I wrote
for The Hill, the title was ``It's the Defense Industrial Base,
Stupid,'' and, again, I think it's really something we have to
keep reminding ourselves. It's how we won World War II when you
really drill down in terms of the overwhelming force that our
industrial base was able to bring to the battle.
I come from a district which, going back to the Obama
administration, has the number one priority of--acquisition
priority in terms of recapitalizing our undersea nuclear
deterrent, the Columbia program. It just laid the keel for the
first of 12 ships that are going to be basically built through
the late 2030s and it is an all-hands-on-deck situation right
now in terms of both workforce, supply chain, and facility.
The omnibus that we just passed, and the President signed
on December 29th, included $768 million for those three
critical items that are necessary for this program to succeed.
In the FYDP [Future Years Defense Program], which came over
with the 2023 budget, actually proposes another $1.6 billion of
investment, again, in workforce, supply chain, and facility.
So, Matt, you've been around this business a long time. I
mean, what--in terms of the demand signal and the investment
signal that the Navy has put into that program, how--what's
your take on it and should--is that the approach that really we
need to sort of size up for other parts? Not just of the Navy's
budget but, frankly, other service branches?
Mr. Paxton. Other programs? The answer is yes, sir. You
know, your work on the House, Education, and Labor and this
committee, I think, led to a lot of those type of thoughtful,
you know, considerations on investment.
I will say this, sir. The private shipyard industry every
day of the week is investing in their workforce. So, they have,
you know, training facilities, apprenticeship programs. They
team with local, you know, community colleges.
So, investments like this from the Federal level kind of,
you know, get bang for the buck for what the private industry
is doing as well. So, I really do believe--while we care deeply
about the submarine industrial base, the fact that some of
these monies are going to go across other shipbuilding programs
is absolutely critical and it's also critical for our supply
chain, trying to build that out as well. So, these investments
are right on spot.
Mr. Courtney. Great. Thank you.
And, again, I would emphasize, this funding is not just
going to southeastern Connecticut. This is going all across the
country because the supply chain necessary for Columbia is
critical.
We just had a new contract signing in Alabama with Austal
that will become a major supplier into that program. And,
again, just to follow up your point, you know, this--we have
been working on this for a number of years and, in fact, the
Department of Education career and technical education funding
which funds the tech schools, the Department of Labor's funding
for pre-apprenticeship training through the Workforce
Investment and Opportunity Act and the National Apprenticeship
Act, you know, that has really been the pathway that we have
gone from 7,000 workers to 19,500.
And so, again, it really--if we're going to get serious
about really expanding the workforce of the industrial base it
has to be an all-of-government endeavor that includes the
departments that have really been in this space for a long
time. And, again, I would appreciate your thoughts on that.
Mr. Paxton. And, Congressman Courtney, as you know, in the
shipbuilding and ship repair industry we're heavily
regionalized so we don't have necessarily best practices
throughout. We don't have an accreditation necessarily in--
across the Nation.
So when you have that regionalization in workforce
development and those processes to have a Federal agency kind
of bringing in best practices, I think, is a smart move and I
think the industry--single biggest issue facing the industry is
people and that's going to be the case, going forward, and we
got to be more creative in our workforce development. So, I
think initiatives like this are hitting the spot.
Mr. Courtney. Thank you. Again, if you go back to the World
War II example, in 1937 Congress passed the Fitzgerald Act,
which created the National Apprenticeship Program which set a
national standard for the trades, whether it's welding,
electricians, sheet metal, shipwrights, you name it, and that
created sort of a baseline of quality in terms of the workforce
that, again, fast forward just even a few years after that law
was signed it was critical in terms of making sure that the
ability of our industrial base to meet the moment and build the
ships, planes, you know, ground vehicles, et cetera, was
actually able to succeed.
Thank you, Mr. Chairman. I yield back.
The Chairman. The Chair now recognizes Mr. Wilson from
South Carolina.
Mr. Wilson. Thank you very much, Mr. Chairman, and, again,
congratulations on your chairmanship and we're really
appreciative.
Secretary Fanning, supporting allies and partners through
foreign military sales is a function only secured by the
Department of Defense acquisition system, which standard
contract takes an average of 18 months to award.
As tensions with China grow, the aggression by war criminal
Putin into Ukraine, and the threats to Israel are ever made by
Iran, what can the Department of Defense do to improve the
overall foreign military sales process to deliver the best
capability to partners in an accelerated time, especially for
those in a current conflict, to try to achieve peace through
strength?
Mr. Fanning. I think there are many things.
First of all, this--like, this will be a reoccurring theme
today, I'm sure--we're poised for peace--our sense of urgency,
our processes, how we invest--and we have got to move
dramatically away from that to a sense of urgency and the FMS
[foreign military sales] system is certainly a part of that.
And it's only going to get worse. The weapon sales we
talked about to Poland, when we transition from giving things
to Ukraine to selling things from Ukraine, it's going to grind
down to a very slow process when it goes through the foreign
military sales system.
So I think there are a number of things we have to do. We
have to streamline the process. We have to change the
presumption that's built into the process from the start to the
finish, and it's really going to take dedicated senior leader
attention to make sure this moves through the process.
Mr. Wilson. And we need your industries to really be
prepared. An unintended positive is that our allies in NATO
[North Atlantic Treaty Organization] who were formerly of the
Warsaw Pact, it's a wonderful opportunity for them to divest
themselves of Soviet-era equipment but immediately backfill for
the defense of their countries with defensive capabilities. And
so not only threats but we have opportunities and so I wish you
well on that.
And, Secretary Norquist, the defense industrial base under
current policies and financial investments are not currently
oriented to support a defense ecosystem built for peer
adversarial conflict.
There's a mismatch between what our national strategies are
and our defense industrial base as postured, and with the
return of the great power competition this gap is an
unsustainable indictment.
With that, what can we do for the United States to lean
forward on the critical issue? What can the U.S. defense
industrial base do to increase outputs at a normal supply
regularly scheduled demands while also rapidly fulfilling a
surge and reconstituting military demands required for the
potential of peer and near-peer conflict?
Mr. Norquist. So I think one of the first things, and I
know this committee has mentioned this Department, is to look
at the consumption rates and the expectations of the inventory
we need in a high-end conflict.
The quantities you need if you're only expecting low-end
conflicts or regional conflict are modest. You can replace
them. But what we're seeing in the Ukraine is the volume of
artillery, the volume of other munitions, being consumed and
you need to start building stockpiles and quantities to meet
that.
The second thing is when you look at contracts are you
pricing it to get exactly a certain number and no more or are
you building in resilience, additional capacity, additional
throughput, spare parts in line so that there's not a
disruption? Both of those could go a long way to making it much
stronger.
Mr. Wilson. And in addition, we're all so pleased that we
have had a significant prepositioning in Europe----
Mr. Norquist. Correct.
Mr. Wilson. [continuing]. With--and maintained it through
the post-Cold War period, and a concern so many constituents
have are we depleting too quickly. But we do have extraordinary
capabilities that are already in place and particularly for
delivery to the extraordinarily brave people of Ukraine.
Mr. Paxton, your written statement describes the Navy as
having provided mixed messages over the last 5 years. What
specificity and clarity does the Shipbuilders Council of
America need for the United States Navy to ensure that the
industry can accomplish the 355-ship objective?
Mr. Paxton Well, I think it begins with stable budgets and
I think the shipyard industry will tell you--the private
industry will tell you that 10-year horizon--what is the plan
over this 10-year period.
We know the 30-year shipbuilding plan is going to not be
fully in line with what's going to happen. But that 10-year
horizon allows shipyards, again, to make critical investments
in its facilities and its workforce.
I think we have benefited from concepts where we split
various ship sizes across shipyards. I think there's goodness
in trying to get serious construction going, keep hot
production lines going, and keep the workforce learning. I
think those are things that will help, and we're also there to
meet, you know, as partners with the Navy on, you know, new
technologies and new ship classes. We're part of the team.
The Chairman. The gentleman's time is expired.
Mr. Wilson. Thank you.
The Chairman. The Chair now recognizes the gentleman from
California, Mr. Garamendi.
Mr. Garamendi. Thank you, Mr. Chairman, and for each of the
witnesses, thank you.
I'm going to take this in a slightly different way probably
because for the last 4 years I've been looking at readiness,
otherwise known as are we ready.
The bottom line of it is that we spend an awful lot of time
and energy in this committee to buy bright new shiny things,
all of which are extraordinarily expensive, and we don't spend
much time thinking about maintaining them.
So this is my own little particular area of concern is I
would like us as a committee here, as the authorizers of the
purchase of bright new shiny things, that we require that we
always, together with the new, plan for the maintenance as they
grow older.
F-35, a rather good example of, what is it, 15 years now we
have been working on that and now we're finally thinking about
a depot in--a repair depot in Florida. Gee.
Ships--Matt, we can talk about that. Yeah, we have a 20-
year SIOP [Shipyard Infrastructure Optimization Program]
program for the public yards, which is absolute baloney, not
worth anything. You give me a 1-year and a 5-year plan and you
have my attention. I think somebody mentioned 10 years. No.
What are you going to do in the next 5 years and how are you
going to get and then beyond that?
I suppose I'm just going to yield back. I'm just going to
express my frustration at the defense industrial base but
mostly at us for not paying attention to the ongoing
maintenance and requirements that have to be built into it.
And so, we find ourselves with ships. Maybe we can keep 50
percent of them at sea. Oh, we're going to have 350 ships.
Really? And we can't even keep half of them at sea? F-35s--we
go on and on and on here.
So I'm going to just give you a heads-up, folks. I would
think the new chairman of the Readiness Committee will follow
along with similar concerns that I have about being prepared,
maintenance.
We can take a look at Ukraine and whatever we send there is
going to have to be maintained. They're doing a pretty good
job, actually.
I'm going to yield back and let somebody else go. I've been
banging this drum and enough said here. But we have got to
maintain. Oh, did I mention O&M [operations and maintenance]
for us? For this committee and for the appropriators, heads up
on O&M.
That's everything that needs to be done for readiness and
we rip it off every year. If we're not ripping it off the
appropriators are and if the appropriators aren't ripping it
off the military Department of Defense is doing it. I'll let it
go at that. I yield back.
The Chairman. The Chair now recognizes the gentleman from
Colorado, Mr. Lamborn.
Mr. Lamborn. Thank you, Mr. Chairman, for having this
hearing and I want to thank all the witnesses for being here
today.
Mr. Paxton, I'd like to discuss the Navy's submarine
industrial base with you. As you know, the plan is to produce
one Columbia-class and two Virginia-class submarines per year
at Electric Boat in Newport News.
The Columbia program has very little, if any, margin for
error as it needs to start coming online in October 2030 to
replace the current Ohio-class submarines that will begin
retiring in fiscal year 2027.
This is a massive task for our shipbuilders. A recent GAO
[Government Accountability Office] report found that after more
than a year of full-scale construction on the first Columbia,
shipbuilders are facing delays because of challenges with
design, materials, and quality.
The GAO report also questioned the plan to add staff to
Columbia from Virginia since they assess there is not
sufficient long-term planning for shared risks between the
programs.
Can you share your views on this challenge with the
committee, specifically the workforce and material availability
issues that are already plaguing this no-fail program?
Mr. Paxton. Yeah. Thank you, Congressman. Tough question.
I will say that----
Mr. Lamborn. And could you put the microphone closer to
you?
Mr. Paxton. Yeah. Sorry, Congressman.
Yeah, I will say that, unfortunately, as a representative
of the trade association I don't have a lot of visibility into
the specific programs. That would probably be more of a
question for the vendor to kind of dig into some of those
really technical issues, probably some classified issues as
well.
I will say that the industry is certainly up for the
challenge. We are hiring rapidly. I know Electric Boat has been
one of the top hires in that area for that program. But as for
the specifics as to what's going on there, sir, I apologize. I
don't think I can really get into much granular, you know,
detail.
Mr. Lamborn. Okay. Well, we'll certainly be pursuing that
with some of the other folks you mentioned in the near future.
And, Mr. Fanning, I have more of a general question for
you. The last time we met we had a great discussion about the
need to build and expand the defense industrial base workforce
and talent pipeline.
It's always a challenge and there's a challenge sometimes
because industry has different pay scales, maybe, than
government service. How can the defense industry better recruit
and retain workers and how do we deconflict these efforts
between government and industry to ensure adequate staffing?
Mr. Fanning. Thank you for that question.
Workforce is the single most important issue for our
industry and many other industries, I'm sure, and that was
before COVID, before inflation, before the surge that we're
going through right now.
I think there are a number of things that we could do in
the near term. You know, it's harder for our industry in a
number of ways. One, we can't work from home in most of the
jobs. Two, a number of them are cleared--the security clearance
process--and I've been talking about this or I've been a part
of conversations for 30 years since I used to work on the HASC
[House Armed Services Committee] staff on this issue.
But we have got to do something about that because it's
increasingly difficult to get a workforce in on the national
security side.
Also, with inflation--not just with technological
development on the commercial side over time but with inflation
there's a growing divide between what we can pay on the defense
side and what they can pay on the commercial side.
The Department of Defense requires some pretty strict
definitions, requirements for the workforce that don't
necessarily align with what we think we need and what we can
hire from the outside.
So there's no silver--single silver bullet for this and, in
fact, I think it's--if we don't get at it for the country as a
whole we're going to continue to have problems in the defense
industrial base.
Mr. Lamborn Well, we're going to certainly need the help of
all the people in your association.
Thank you, Mr. Chairman. I yield back.
The Chairman. The Chair now recognizes the gentleman from
New Jersey, Mr. Norcross, for 5 minutes.
Mr. Norcross. Thank you, Chairman, and to you for holding
this hearing, and we are only scratching the surface on this
issue. It is complex. It's what we have been doing for years.
Mr. Wittman and I have traveled extensively and it's not
unique to this country about the industrial base and, in
particular, the workforce. We are timing out of those who have
grown up with the idea of working with your hands was noble.
We all understand that, the narrative that's going on, and
I hear it every day in Labor and Education is you got to go to
college in order to make it in America and that somehow if you
work with your hands you are less than.
Well, the first thing we can do as a nation is give credit
to those who want to work with their hands and their head. But
parents, guidance counselors, teachers, from very early age are
telling them college is the way to go. And that's true for some
but, certainly, not for all. We have the ability to change
that.
Our industrial base, I hear about the signals and the
budgeting. Couldn't agree more. We had an opportunity and had
it for 4 years trying to change the Buy American provisions. We
can't buy it all ourselves. We need those trusted partners.
But we can incrementally build it back to where it was. We
have offshored so much of our supply base over years. It's not
a 1- or 2-year. If we had followed this--and we'll have another
opportunity this year--it sends your demand signals that you're
asking for. We don't have to get to a hundred but we have to
build from that.
So my question to each of you very simply is, in your view
what role does government have versus the commercial industry
in managing the risk that we are talking about.
We have come from a just-in-time supply base, which means
you don't have anything sitting on the shelf, to right now
we're hearing the other end of it where we can't get it because
it's not just-in-time. Whose responsibility and where does that
line go?
So, Mr. Fanning, if we could start with you.
Mr. Fanning. Thanks for that question.
I think, as I said in my opening statement, the defense
industrial base has a single customer and response to that
customer, and I think there are--Secretary Norquist said two
things. We can stockpile, we can build surge capacity, and
there's a third thing we can do that we're doing, which is
industry and the Pentagon working together to identify when we
mobilize what is it that we need to surge, because as Ranking
Member Smith said we can't across everything we buy stockpile
and build in surge capacity.
So if it doesn't meet the level of wanting to stockpile or
paying the extra to build surge capacity in, we can break down
what those items are that we need when we mobilize, when we
surge, figure out what are the long lead issues in there. Is it
workforce? Is it materials? Is it parts? Is it tooling? And
make sure that we have those elements ready.
Mr. Norcross. Yes. So the explosives and the accelerants--4
years ago we started changing that. If you go to any of these
plants around our country, it's a roll back to World War I and
World War II, literally. So the GOCOs [government-owned,
contractor-operated] address that issue but who ultimately
bears that responsibility?
Mr. Norquist, you've been in the middle of this.
Mr. Norquist. Sure. So I think when you look at quality,
personnel, and so forth, those are the responsibility of the
company. But many of the conflicts you raise are strategic
risks and it gets back to the thing that Ranking Member Smith
made, which is you can't cover everything.
So what is it that is the highest risk? Is it a--based on
models and wargaming, is it munitions that you're afraid of
running out of? Is it certain platforms? Is it the supply
[inaudible]?
You have to model that to be able to decide where are you
prioritizing the investments, where you're going to pay to have
a GOCO because you want that extra modern facilitization or
where is it that's worth having surge capacity.
That's so closely tied and that's the reason we're talking
about this, which is because we pivoted to a high-end fight all
of those risk calculations are changing. Before we modeled it
based on the types of threats we had.
We're now facing a different one. That's why I think that's
essential to the government to say these are the risks we want
to pay and to reduce and this is how we intend to do it and
that's, I think, where the combination comes together.
Mr. Norcross. Thank you. In our last 30 seconds, you.
Mr. Paxton. I was going to say, on some of the surge
capacity that we see the government buying large infrastructure
be it a dry dock there's language in the fiscal year 2023 NDAA
that said, hey, let's look at the best case analysis for what
you're going to do with that dry dock. So, we support surge. We
understand that it's a necessary aspect for the Navy. But we
just don't want to be in competition with those assets.
Mr. Norcross. I yield back. Thank you.
The Chairman. The Chair now recognizes the gentleman from
Virginia, Mr. Wittman, for 5 minutes.
Mr. Wittman. Thank you, Mr. Chairman. I'd like to thank our
witnesses for joining us.
Let me begin by saying how concerned I am about the
messaging coming out of the Pentagon, especially this past year
where they made some comments about the industrial base. The
Department of the Navy said that they do not believe the
industrial base can deliver the three Arleigh Burke-class
destroyers that were authorized and funded this past year. To
me, that's deeply concerning.
I want to get some perspective from all of you all about
the foundational aspects of our industrial base. I believe that
the industrial base is given clear objectives, understanding
what the procurement process is going to involve in the long
term, that they will be able to invest in their workforce, be
able to invest in infrastructure, be able to make the
investments necessary to scale to consistent production over
the years.
And I want to begin with Mr. Paxton. Can you give me your
perspective about how inconsistent and wavering procurement
objectives from the Pentagon affect the industry's ability to
be able to do the long-term construction elements of our
defense budget that it's called upon to do and especially, too,
when, you know, the Pentagon speaks out of both sides of their
mouth.
Says, well, we need all these ships or we need all these
aircraft or we need all these platforms, yet we don't believe
the industrial base can deliver, and then also provide
inconsistent objectives in procurement.
Mr. Paxton. Yeah. Well, thank you for this committee and
the work they did on delivering those ships in the budget.
I will say this. The question of capacity comes up often
and if you took a poll of the private shipbuilding industry and
ship repair industry they would tell you we have underutilized
assets. We have not utilized assets at all.
So I think there is capacity in the shipyard industrial
base across new shipbuilding and ship repair and I do think in
relations to whatever the demand signal coming from Congress
we're going to meet it. We're going to meet it because we're
going to sequence our yards to be more productive, we're going
to train up the workforce, and we're going to deliver those
assets.
So I think private industry fundamentally disagrees with
the assertion we don't have the capacity.
Mr. Wittman. Got you.
Mr. Norquist.
Mr. Norquist. So I would say that think about what the
signal is, right. If the requirement is three and you say, I
don't think the industry can do it, we'll do two, then you've
signaled to the industry do two. You've sort of given yourself
the self-fulfilling answer.
And we run into that a lot when either the administration
makes a request and vice versa and you've signaled to the
industry, regardless of what you're hearing somebody say they
need, you're only going to get two because you can only produce
two.
Well, the thing that limits them most of all is not having
a contract for the third, you know, it doesn't have to be a
ship, it can be a plane, whatever it is. But when you sign the
contract, they immediately know, I need to increase production,
and when they see that there's more coming they realize, I'm
going to start having a backlog if I don't expand.
So I am more concerned with being clear about what the
Nation's requirement is and we need X number, and then going to
industry and say, now deliver, and when they can see those
showing up in contracts they can then safely make the
investments to increase capacity. But sometimes we end up
signaling the exact opposite of what we intend.
Mr. Wittman. Mr. Fanning.
Mr. Fanning. I'd add consistency as an element here. I
spent far more years of my life in the Pentagon than I have
with industry and I'm shocked at what I didn't know at the time
and one of those things is consistency.
One of our members is a shipbuilder, talks about the Navy
slash chart where, you know, at the end of the years of doing
the budget the number of whatever they're going to build is
three, then it's two, then it's three.
And it's in industry's interest to meet the needs of its
customer. It just needs that clear signal and a consistent
signal so there's trust and belief on the industry side.
Mr. Wittman. Got you.
Mr. Paxton, if the Pentagon does deliver clear budget and
procurement objectives, give me a sense about what that means
to the industry in simple things like developing workforce,
doing long lead time material purchases, making the investments
in the yard so that capacity is there to make sure that the
industry is able to deliver.
Mr. Paxton. Yes, sir. I will say that's going on as we
speak. Even with those slash budgets, those inconsistent
numbers, our yards went out and spent, you know, billions in
updating our facilities so we can meet this demand fully
anticipating that, you know, numbers have been inconsistent. We
have done that.
So not giving you too much more other than the fact that
the industry is making those investments as we speak, sir. And
the last thing I'll say, recruitment of workforce--you can look
around the Nation, it's thousands and thousands in different
places where shipyards are having hiring days.
Mr. Wittman. Mr. Chairman, I yield back. Thank you.
The Chairman. The Chair now recognizes the gentleman from
Arizona, Mr. Gallego.
Mr. Gallego. Thank you, Mr. Chair.
Mr. Fanning, thank you for your testimony.
In your written remarks, you recommend that Federal hiring
practices for contractors shift from a degree requirement to a
skills-first hiring practice. This is an area that I'm very
interested in across all Federal agencies.
Can you elaborate on the hiring changes you've seen in the
commercial aerospace industry? Could you also share any results
that those hiring changes could produce and where the defense
aerospace industry could benefit from adopting these changes?
Mr. Fanning. Well, first, thank you for the question.
First, I'd say, you know, the industrial base is shared. The
supply chain is shared. That's something we saw very acutely
during COVID, and it can shape what companies do, how much work
they want to do on the defense side or the nondefense side and
workforce is a part of that.
But there's much more flexibility on the nondefense side
for companies to hire workers with certain types of skills that
they can train, skill up into something else, or without skills
that they can do.
And it goes back to Congressman Courtney's question earlier
about--or Mr. Norcross, maybe--about apprenticeships versus
college degrees. This gets baked into the input part of the
contract and really limits the defense companies who are
already struggling to build the workforce all up and down,
particularly at the smaller company level.
So, I think trying to free that up a little bit and
recognize a little bit more that the workforce has changed, the
future of work has changed, how we train and educate that
workforce has changed.
We need--we need it at all different levels in the defense
and aerospace industry--workers that come out of apprenticeship
programs, those that have higher education degrees, very
skilled workers.
And one thing I'd say about apprenticeship programs too is
it helps with retention. I had a shipbuilder yesterday say that
they have much higher retention with workers that come through
an apprentice program and have the training and the
understanding what they're getting into than those who walk off
the street.
Mr. Gallego. Thank you for being here.
I'm proud that my district in Phoenix is home to
semiconductor and microelectronics research, development, and
manufacturing. These technologies are essential to every
electronic device and are crucial to a country's ability to
maintain a competitive edge over our foreign adversaries. And
thanks to CHIPS and the Science Act signed into law last year,
we [will] continue to boost our Nation's semiconductor sector,
providing good jobs and helping to combat our reliance on
China.
Can you speak to the importance of the semiconductor supply
chain and domestic investments for the defense industrial base?
Mr. Norquist. So the microchips supply chain is absolutely
essential for several reasons.
First of all, the--with modern technology those chips are
in a wide range not just of the systems that we field but in
the systems that build the things that we field, and so when
you see a disruption you can have a disruption both of the
final product and a delay in everything before it.
But you also have a second challenge, which is, even more
than most other things, microchips have the risk of tamper and
you've got to be certain of the reliability of your supply
chain, the reliability of the items.
This is why it was so important when Congress passed the
CHIPS Act and said this is one place that is worth us
protecting our supply chain producing the reliability.
Now, defense is actually only a small consumer of those but
it is an essential part of the same risks and challenges that
defense faces as well.
Mr. Gallego. Excellent. I yield back.
The Chairman. The Chair now recognizes the gentleman from
Tennessee, Dr. DesJarlais.
Dr. DesJarlais. Thank you. This is for all of you, and we
have covered some of this but we'll just delve into it further.
In my discussions with industry the biggest obstacle to
meeting our production goals seems to be workforce. We are
seeing some encouraging signs, however, including data from the
Bureau of Labor and Statistics indicating that more graduates
are choosing STEM degrees than were a decade ago.
Are these encouraging signs being seen on your end as well
and is the--or is the demand outpacing these growing graduates?
Mr. Fanning. I'll go first. Thank you for that question.
There are encouraging signs, but it's a big hole we're
trying to dig out of and it's compounded now by inflation, I
think particularly on the defense side when there are contracts
without adjustments. Because on the nondefense side,
particularly companies that are involved in both, they can just
move their work and their efforts and their sales over to that
side and change their rates on the nondefense side.
So there are encouraging signs but we--I think we still
have a long way to go and I suspect it's going to be a problem
we're focused on for the duration of our lifetimes.
Mr. Norquist. So when we surveyed, sir, our work--our
membership, 82 percent said it was difficult--somewhat or very
difficult to get STEM, which is even higher than their concern
over clearances, which shows you the demand and the market
competition there.
Part of it was losing out to private sector firms who when
there's a shortage they raise the rates and also that the--
according to the Bureau of Labor Statistics the demand for STEM
positions is going to go up twice as fast as the average.
So this is one where there is a nationwide demand signal
and our players--our membership is competing in that market.
But they do find it very difficult.
Mr. Paxton. Yeah. I would just say that our shipyards
participate in STEM scholarship programs. They go out to local
technical schools and community colleges and work with them on
that. So we see the need and the demand and we're working on
it.
Dr. DesJarlais. Okay. And also what are you doing to retain
some of the graybeard older population in the workforce. As we
reopen these production lines and relearn how to fight an
industrial war for the first time in decades, I would think it
becomes only more vital to retain some of the institutional
knowledge. So in addition to the recruitment efforts you're all
undertaking with the STEM grads, what retention efforts are you
using to maintain the industrial knowledge during the--this
critical moment?
Mr. Fanning. In some industries, in particular, that is a
focus, maintaining--especially as we have lost some of that
apprenticeship capability in the country, maintaining some of
that experienced workforce.
It was made harder during COVID when we had a number of
people who just decided to leave early and retire early. But
companies are doing what they can to try and increase retention
with packages, with bonuses, what have you, to maintain that
skill set as we start to surge.
Dr. DesJarlais. Okay. I'll just add I'm constantly hearing
from companies and small businesses in my district about the
issue of wage inflation and I know oftentimes the defense
contractors operate on fixed price contracts where there's very
little opportunity to pass costs on to the government.
As we gradually see economic price adjustment clauses no
longer being included in the defense contracts I'm curious to
know how you all are dealing with these increasing labor costs
in retaining your workforce.
Mr. Norquist. So, as you point out, the absence of those
economic cost adjustments in existing contracts is a real
challenge because often the government will award a 5-year
contract and when there wasn't much inflation the out-years
went up 2 percent a year.
So small businesses I've talked to, their labor rates are
now locked for 4 years and they know that they can't keep those
employees, you know, after we've had 9 percent inflation, at 2
percent raises going forward.
So, you know, part of their challenge is--in new contracts
they can get awarded at the new rate or new ones if the
government includes economic cost adjustments. But those old
ones really put them in a bind in their risk of losing their
workforce.
So that's one of the challenges particularly small
businesses are facing in this environment.
Dr. DesJarlais. Okay. And I also understand that a previous
barrier to hiring was the security clearance process.
As the backlog for security clearances continues to shrink,
are you finding that this barrier has become less pronounced or
are there still other barriers like cost of--or finding
qualified applicants that are hindering you all?
Mr. Norquist. So, first of all, there are other barriers
but I would like to flag this because, you know, there's a lot
of things in this hearing we're talking about that are
challenges.
The timeline for top secret clearance went from 452 days to
120 and from secret from 244 to 81. Now, you still have to have
a clearance, which is a harder part than a commercial. But that
was an area where there's tremendous focus by this committee
and the government and there's been progress, and when we
survey our membership that shows up.
So, it's an obstacle. It's a challenge versus jobs that
don't require it. But it is significantly better than it has
been in the past and it shows that when the industry and the
government focus on something we can really help move it.
Dr. DesJarlais. Okay. Thank you all. I yield back.
The Chairman. The Chair now recognizes the gentlelady from
New Jersey, Ms. Sherrill, for 5 minutes.
Ms. Sherrill. Thank you so much.
As many of you know, nearly 3 years ago this committee put
together a task force focused on defense critical supply chain
issues. And Secretary Fanning, thank you so much for your help
on that. It's good to see you again.
One of the recommendations of that task force, which was
included in the fiscal year 2021 NDAA, was a requirement that
the Department create a plan to reduce reliance on critical
materials sourced from adversarial nations and that was nearly,
again, 3 years ago.
So last month, I received a briefing at Picatinny Arsenal.
It was really clear how important their work on the supply
chain is and with their hands-on understanding of the munitions
development, supply, and logistics, their expertise is
tremendous and, really, they are key partners, I think, in
leading this.
However, while we saw some good signs--antimony, for
example--I'm incredibly concerned that we aren't making
progress fast enough.
So, Secretary Fanning, Secretary Norquist, Congress has
shown itself to be willing to take action on the issues related
to workforce and our supply chain. I know our chair has
workforce issues front and center.
Mr. Courtney had a great op-ed on that. I know Mr.
Norcross, my chair last year in the Tactical Air and Land
Subcommittee, has been laser focused on GOCOs and COCOs
[contractor-owned, contractor-operated].
But we're just not moving fast enough in these areas and
especially when it comes to some of those critical materials
that we are tracking to sources that are really concerning.
What other authorities and resources do the Department and
industry need to really make serious headway there?
Mr. Fanning. Well, thank you. This is, obviously, a very
critical issue and I appreciate your attention on it.
Part of the difficulty is we found ourselves where we were
relying on China for those minerals over many years, giving up
our capacity and our ability to do that for many reasons, as
has been pointed out--the expense, the environmental impact of
the processing of these materials. So there isn't that
capability and there isn't necessarily a market for that
capability to grow organically on its own.
So one of the important aspects is investment--government
investment--to get that market going to create that
domestically or among our friend-sharing, among our allies, in
order to provide--to create that for our companies in the
industrial base as a supplier.
And so I think it's a sense of urgency on the part of all
of those that are involved. You, clearly--this committee--has
shown that but now it's an issue for the Federal Government to
help create that market--which is not easy to do, I'll grant
that--but if this is a priority of ours, which it is, in order
for us to move away from China faster.
Mr. Norquist. So one of the challenges when you have an
issue that is this complicated is, where in the Pentagon does
somebody feel that they own it and have both the authority and
the leadership to be--to drive it.
One of the tools you have that's coming along that's
helpful is modern data analytics because one of the challenges
in the supply chain is just seeing it, being able to map it.
In many areas that would have been vastly harder to do with
as complex a world as we have. But data analytics is letting
people see into their supply chain better. That can go a long
way.
Many of the authorities--DPA [Defense Production Act] part
three and so forth that allows people to make these estimates--
they exist if everyone can agree on where the problem is and
what needs to be done.
So part of the mapping in those is to help make it clear
that this is a particular choke point, this is a particular
risk, and the ability to onshore it or whatever it is will pay
off, right, and then you can help move it. But I think,
hopefully, that with advances in some of the data analytics
they can get further progress on that issue.
Ms. Sherrill. Thank you so much.
And then to Mr. Paxton, you know, one of the first things I
asked when I came--of our shipbuilders when I came to Congress
and was--Mr. Deluzio, your head--I'm kidding. Not used to the
second row and this angle.
But one of the things I first asked our shipbuilders was,
you know, if you're facing these cold supply chains why can't
you build commercial, and certainly something that I've seen
throughout COVID with some of the most resilient businesses
that I have in my district, they had some combination of
military and commercial technology that they were selling.
And so when we see these disruptions, when we know how bad
it is to go cold, when we see that resilience, and then when I
get a brief in this committee that our competitors are doing
just that after being told by our shipbuilders that we somehow
could not do that and, you know, I just want to understand what
is the hang-up there because it seems like a good solution and
it seems like our competitors are doing it.
Mr. Paxton. I will say some of our shipyards are doing
that. Now, it's out of the scope of some Navy shipbuilding
programs but we certainly have shipyards that do that.
If it's Coast Guard shipbuilding, they cut their teeth on
commercial work. We do have some traditional Navy shipbuilders
that would have had a gap about 8 months if they didn't have
commercial work, but they had that commercial work in there and
that got them past 8 months.
A shipyard will not be in business for 8 months if they
have to maintain their employment and have no work, and so that
has happened in a traditional Navy shipbuilding yard.
The last thing I'll say is military SPEC [specification] is
serious work and that's work that a lot of our shipyards are
focused on because that's what their customer demands.
Ms. Sherrill. Thank you. My time has expired. I yield back,
Mr. Chair.
The Chairman. The Chair now recognizes the gentleman from
Mississippi, General Kelly.
Mr. Kelly. Thank you, Mr. Chairman. Thank you, witnesses,
for being here. And I've missed a lot so if I double tap, but
Mr. Wittman stole all my good questions.
But just--I just want to double tap on how important the
consistency of requirements is to our industrial base, number
one, to produce in bulk and to bring the cost down for the
United States Government and the manufacturer and it does
everything.
I want to talk just a little bit about that in a different
sense. Many of our services like to get a product, they tell
you what they want, and then they want to start making changes
because there's a new shiny object. I can't update my iPhone
every time it changes or I would never have an iPhone, if I get
the newest one.
How much does that hurt you when they change the
requirements and how much does that cost the American
taxpayers?
Mr. Fanning. The lack of consistency is a real problem. I'd
go back to the start of your question about even the
requirement process itself. Increasingly, as new technology is
developed outside of the Department of Defense, we don't always
know what we want inside the Department of Defense and so I
think it's important to open up that requirements process a
little bit, be open to companies, to industry, on ideas that
they have, and then to be consistent but also allow mechanisms
to modernize in a different way than we used to.
Your phone is a perfect example of that. We used to think
of modernizing as buying something for a generation, putting
new things on it. But now modernization takes place while we
sleep. So that lack of consistency makes it hard for industry
to put its investments in place.
Contracts are the most obvious way, obviously, but
companies that wait for a contractor are behind the curve and
they know that. They look at strategies. They look at
statements. They have conversations.
They want to line up their industrial investments in
advance of the contract so they're ready. So that consistency
is important because without it, it increases the risk of
making those investments.
Mr. Kelly. So how do we stop the good idea fairies? And
I'll use an example. The landing ship medium or the light
amphibious warship--the LAW--you know, it's not made to be a
combat ship, okay. But now we want to say, well, it's not this
or it's not this survivable.
I mean, we try to add purposes to it to build it to
something that it was not intended to be. We did that with the
Humvees in the Iraq war. We went from something that was to
move around rear areas, light-skinned, to not be a combat
vehicle, and tried to turn it into a combat vehicle, which it
will never be.
So how do we stop these good idea guys in back rooms who
go, hey, we can add this, we can add this? How do we stop that?
Because that costs us tremendous dollars and readiness.
Mr. Norquist. So one of the things is internal to the
Pentagon in those decision processes is to require the
requirements changes and the dollar costs be dealt with at the
same time, right.
If you're going to change the requirement you've got to at
the same time explain the dollar cost and how that's going to
be absorbed and what the offsets are. When you can have--you
gave examples of taking something for a completely different
purpose.
The place you can manage is when you say in 2 to 3 years
there will be a block upgrade of this platform and then
everybody knows to buy parts to get to until that point.
Everyone knows at that point there is going to be an upgrade of
some piece of it.
Those are much more manageable. Those, the supply chain
knows how many to make. It's, as you point out, when you're
trying to take one thing and use it for another you can often
drive the challenge.
Mr. Kelly. And just real quick, you know, I mean, the Navy
owes us a ship plan, not a multiple choice of what we--you get
to choose. They owe us what we're going to build the next 10,
20 years and some type of cycle that you can rely on as being
reliable. These are the things we're going to build so you can
maintain those workforces, do them in bulk when possible, and
bring them out on a schedule on time.
The final question I want to ask is what is industry doing?
China is in all our business. They're in intellectual property.
They're stealing intellectual property. They're embedding in
all of our security things in the industry.
What is industry doing to combat China and understanding
that they're a threat to national security? Even in the
civilian shipbuilding or airplane building modes what are we
doing to kind of keep them out or to shield us from the threats
of the Chinese government?
Mr. Paxton. I'll take it from the beginning. I will say we
are suffering as an industrial base from heavy subsidization in
China. That's been a concerted effort for the last 20 years and
our supply chains are weaker from it. And, certainly, we don't
build commercial assets for international commerce because we
can't compete against the federal--I mean, the Chinese
government.
Mr. Kelly. And real quickly on that same thing, are you
identifying to DOD what supply chain issues, critical
resources, critical assets, that we're short of in order to
maintain ship and airplanes and building them? Is that
communicated to DOD so they understand what those restrictions
are?
Mr. Fanning. There are, yes, ongoing conversations at the
Department of Defense among the primes--the companies that work
with the Department--about where they have concerns in their
supply chain.
Mr. Kelly. I yield back.
The Chairman. The Chair now recognizes the gentlelady from
Texas, Ms. Escobar, for 5 minutes.
Ms. Escobar. Thank you, Mr. Chairman, and thanks to our
ranking member and thanks to our witnesses. Gentlemen, thank
you for being here with us. Good afternoon.
I represent the great community of El Paso, Texas, which is
home to two tremendous assets. The first is, of course, Fort
Bliss, which is the Nation's second largest military
installation and the largest joint mobilization force
generation installation in the Army.
The second key asset for us is the University of Texas at
El Paso, which has a phenomenal engineering department and has
been a national leader on additive manufacturing. And I have
seen firsthand the benefit of tapping into the brilliance of
our higher educational institutions in order to capitalize on
the talent there and the innovation there and to use it for our
national defense and, indeed, even for some very practical
purposes.
One of the things that has been going on at Fort Bliss in
my district is the creation of 3-D barracks, barracks that have
been built using 3-D printing capabilities. It's incredible.
I've toured them, felt them, seen them, walked around in
them. It really is amazing, especially as we think about our
outdated facilities that have not seen enough investment.
And so I'd like to ask, actually, all our witnesses and
maybe starting with you, Secretary Fanning, could you give us
input on utilizing additive manufacturing capabilities to shore
up the state of our installations and our shipyards?
Mr. Fanning. I think there's still tremendous untapped
potential in additive manufacturing. On the manufacturing side,
you know, it started with how can we manufacture a part
differently and now they're completely reengineering things
because they can make parts in ways that they never imagined
before, which allows them to reimagine what it is they're
building to begin with.
And so, certainly, I know from my time in the Department of
the Army that we were thinking about that, how you could do
that for installations on--even on a deployable basis. NASA is
looking at it for Mars and the moon. And so there definitely
are applications for that for installations, which absolutely
are underinvested in--one of the many things that are
underinvested in over years.
Ms. Escobar. Thank you.
Mr. Norquist. It is a fascinating technology with
incredible capability. I mean, one of the most common problems
we have in defense is we want small quantities of unusually
shaped things as a spare part and it's hard to convince
somebody to put together a manufacturing line to do that.
But with additive manufacturing somebody can say, give me
the digital design. I will print one, two, three, whatever you
want. So those changes are really driving consequences for
housing, for parts, and for other things. And I think there's a
long way to go and this is why university research is so
valuable to help us understand what is possible and then
industry and the Department can take advantage of that to
really change the way things work.
Mr. Paxton. Thank you for the question.
I would also add that right now we're in the process of
additive manufacturing, 3-D printing still needs to be
certified. So we're still kind of in this stage as it relates
to shipbuilding. If you put that part in there it still has to
meet military SPEC and we still need to understand how that's
going to work over the life of that vessel.
So, we're in the learning phase. We're in the let's get
there phase. But some of that stuff still needs to be tested to
make sure it can withstand military operations.
Ms. Escobar. And, really, to that point, I am very curious
about what you all might think are some of the biggest
obstacles to putting this potential on steroids, so to speak,
how we can really capitalize on this in a more urgent way.
Mr. Norquist. I think you hit the key one, which is if
everything has to be certified, right, if each piece needs its
own certification process then you can't build one-offs.
Now, if the piece of equipment can be certified for what it
produces, I think you're there. But that requirement to say I'm
treating it like it's an assembly line that's going to produce
a thousand, I want to test a sample, doesn't work if you
producing one, two, or three.
And so I think that may be your largest obstacle. They may
have others as well.
Mr. Fanning. I would--I would tie that back to the
requirement process, too. You might be defeated right from the
start where something is baked into the requirement process.
If you have the flexibility the certification process is an
issue and I want to foot stomp on something David said. The
quantities--we're a big--the defense industrial base is huge.
But the quantities of some things it needs don't necessarily
yield some organic growth, for chips, for critical minerals, or
for the parts that you might be talking about in this instance.
And so sometimes the limited quantities of things we buy make
it hard to find a new source for them.
Ms. Escobar. Thank you, gentlemen. My time has expired. I
yield back.
The Chairman. The Chair now recognizes gentleman from
Nebraska, General Bacon.
Mr. Bacon. Thank you, Mr. Chairman, and welcome to all
three of you. It's great to be with Mr. Fanning. We serve on
the Air Force Board together and you do a great job. So,
appreciate that.
The state of the defense industrial base is, obviously,
weak. I think we get that from the briefing today, and we see
it with Ukraine. Now we're seeing it with Taiwan. Hard to do
both at the same time. And so this is a strategic issue with
strategic consequences that we got to get right.
So, my first question for Mr. Paxton. The CNO [Chief of
Naval Operations] recently highlighted the inability of the
defense industry to keep up with the shipbuilding requirements.
So, for example, they want three Arleigh Burke destroyers. The
industry can only do about two. When it comes to attack
submarines we need two a year. We can only get one. How do we
get this right?
Mr. Paxton. Well, I think from the get-go we want to get
the requirements right. We want to make sure we're, you know,
in a partnership together with the Navy, that we know exactly
what we're going to go build and go build it.
I do think industry would disagree a little bit and say if
we had that demand signal previously, we would be ramping up
already. We can certainly meet three DDGs [guided-missile
destroyers] a year and we can certainly do the work we're doing
on submarines.
But there--and also industry wants to work with the Navy on
this. It should not be an adversarial type scenario. Industry
is making investments in their facilities constantly, and their
workforce. So I think there's a disagreement that we're not
meeting that mark.
Mr. Bacon. Okay. So it sounds to me like right now we're
not meeting it but we have the potential that we can meet it.
Mr. Paxton. Sure. I mean, and I think, again, we would
probably disagree that we're not meeting it right now. I think
there's things that are inherent in the shipbuilding and ship
repair that cause certain schedule delays and certain issues
that aren't all industry's fault.
Mr. Bacon. One of the things I read recently, and it's
alarming, that China has 10 times the shipbuilding capacity
that we have. I think as Americans we need to think about that.
I think that's unacceptable.
Mr. Norquist, the Department of Defense spent $34 billion
or, roughly, 4 percent of their total budget, on innovation
spending and of those projects funded with this innovation
spending only 3 percent resulted in operational capability
being delivered to the warfighter.
So what recommendations would you have for changing our R&D
process to increase the return on investment?
Mr. Norquist. So, one of the important things is to make
sure that those who are funding research and development are
connected with those who have responsibility to field systems
and requirements, and so one of the challenges is making sure
they're meeting.
So the answer is if somebody succeeds in this research
initiative, are you going to pick it up. And what we have found
in the past is, in some cases, that understanding wasn't there.
In others when it was, the question is, would--did you just say
you're going to pick it up or did you set aside money to be
able to pick it up.
And so one of the challenges becomes how do you set aside
both--how do you build that connection between those two
communities and the other is how do you set aside, like we do
for S&T [science & technology], the money to pick up that
result when it succeeds to allow them to start.
Now you go to the service and you got to finish funding it
in the out-years if you're going to pick it up. But that's, I
found, was the most common breakdown; either the research
community and they hadn't talked with the acquisition or at the
point of handoff the person says, well, I don't have money in
my budget this year but maybe in 2 years I can, at which point
the small businesses is going somewhere else. That would be my
primary recommendation.
Mr. Bacon. So is this, like, an organizational problem? We
just don't have the--have them linked correctly?
Mr. Norquist. Part of it is. I mean, part of it is making
sure that those groups--I mean, if you think about it, we do a
pretty good job in the Department of Defense, or they do, when
they have to have an airplane at a base with crew and a
facility by a certain point in 3 years, right. Those things
line up.
So those communities are able to talk. The question is,
what is it about when we research things that when they have
breakthroughs it isn't quickly picked up and how do we make
that go faster.
Mr. Bacon. I did have a question for Mr. Fanning on rare
earth elements but I think you've already addressed that. I
would say that we do have this--that capacity in our own
country. So, it just takes willpower and a plan to do that and
we can't rely on China.
But I won't ask you a follow-up because I think you
addressed it very well already. So, with that, I appreciate all
three of you. I yield back.
The Chairman. On that point, I would like for you all to
give it some thought and follow up with the committee and let
us know if there's something we can do in the NDAA that would
facilitate or aid companies in that processing lane to be able
to stand up more capability for that processing to take place
either in CONUS [continental United States] or at least in our
hemisphere where we have some friendly allies.
It is completely unacceptable that we're so heavily reliant
on China for those minerals as well as their processing.
[The information referred to can be found in the Appendix
beginning on page 127.]
The Chairman. The Chair now recognizes the gentleman from
Pennsylvania, Mr. Deluzio, for 5 minutes.
Mr. Deluzio. Thank you, Mr. Chairman. Gentlemen, thanks for
being here today.
I want to focus my question on the Defense Department's
2022 report, I should say, on how consolidation of the defense
industrial base poses serious risks to our national security.
Weak or, frankly, nonexistent antitrust enforcement, in my
view, allowed this to happen and here's where we are.
Through vertical and horizontal acquisitions since the
1990s we have gone from 51 to only 5 aerospace and defense
prime contractors--a 90 percent reduction. Over that same
period we have seen suppliers in a bunch of categories
disappear, depriving the American people of competition for key
elements of our defense--tactical missile suppliers 13 down to
3, fixed-wing aircraft suppliers 8 down to 3, satellite
suppliers 8 to 4. We have got 90 percent of our missile
suppliers--excuse me, 90 percent of our missiles coming from
three sources now.
This defense industry consolidation, this lack of
competition, it's leaving us, I fear, ill-prepared and harming
our national security and readiness.
One reason I was eager to come to Congress and join this
committee was to dig in on how consolidation in so many
industries, including our military's industrial base, is
hurting our country and in conflict with our economic goals to
bring more union jobs, manufacturing, and supply chains back to
this country.
2019 piece from the American Conservative, Matt Stoller and
Lucas Kunce, they wrote, ``Despite spending large amounts of
money on weapon systems the American defense establishment
often gets substandard equipment. It's dependent for key
sources of supply on business arrangements with potentially
hostile powers. The problem is so big, so toxic, and so
difficult that few lawmakers even want to take it on.''
So today, gentlemen, my question to each of you is the
same. What do you see as the gravest threat caused by this
consolidation in the defense industry?
Mr. Fanning, I'll start with you, sir.
Mr. Fanning. Thank you. An important question.
I think--I don't think consolidation is what's to blame for
the shrinking number of companies doing business with the
Department of Defense and, by the way, if you look at
nondefense companies doing business with the Department of
Defense that's shrunk even more.
I think consolidation is, first of all, at the prime level
was by design in the 1990s when the Pentagon realized that we
weren't going to be buying as much. Part of competition is
having competitions and the Department of Defense determined we
had too many companies for what we're going to be buying in the
future and started the process of consolidation.
And 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.
I think the real thing to look at in the DIB is why is it
so hard for new entrants to break in because I think it is
increasing. The Department has always been difficult to work
with for obvious and important reasons. But I think, over time,
it's becoming increasingly difficult. And as more technology is
developed outside of the Department versus the 1960s, it's ever
more important that we find ways to let those new entrants in
and grow the DIB with new entrants. That's a part of what goes
hat in hand with consolidation.
Mr. Deluzio. Mr. Norquist.
Mr. Norquist. Yes, I think when you start, you'll--most of
those in that report--most of those mergers and acquisitions
occurred several decades ago, driven, in fact, by the drawdown
after the Cold War.
What you've seen mostly in the more recent time is firms--a
drop in firms willing to enter the defense industrial base or
firms who are already here leaving, not necessarily primes but
others. And I think that gets back to the question of one is,
what's the--if you're not buying as many helicopters you won't
have as many companies that make them because when one person
loses they can't sit out of the business for 4 years very
easily.
But for the smaller firms, the ones you're trying to grow
to come in, what are the barriers that we are putting in their
way and how do we try and remove those because part of the way
the private sector grows competition is new firms keep entering
and new disruptors keep showing up.
And so one of the questions is are we properly making it
suitable for those firms to come in. There are certainly
mergers and acquisitions where somebody is trying to protect
the loss of a supplier who might otherwise leave the industrial
base or there's a technology they think they can make more
effective.
But I would focus on why are people not staying and how do
we draw people in, because that's the best ways to sustain
competition.
Mr. Deluzio. Thank you. Mr. Paxton.
Mr. Paxton. Yeah. I would just say from the shipyard
perspective, again, we're heavily capitalized intensive
organizations. We're dealing with facilities that have working
waterfronts where oftentimes even if you're not a Navy
shipbuilder, if you want to get into some of the maritime
supply space and shipyard space you don't even have access to
it from a geographical standpoint.
So there's some of that limitations that exist in our kind
of small piece of the pie.
Mr. Deluzio. Gentlemen, thank you. I yield back, Mr. Chair.
The Chairman. Yeah. Mr. Deluzio brings up a great point and
we're going to pay more attention to this. Not only are these
companies getting gobbled up by the primes, we have got to
figure out a way to help these small and mid-sized defense
contractors be able to grow without being consumed and so that
we do have a broader base--industrial base, and we're going to
be having some dialogue about that as we move forward. But
thank you for talking on that, and I share your concern about
it.
The Chair now recognizes the gentleman from Texas, Admiral
Jackson.
Dr. Jackson. Thank you, Mr. Chairman. I appreciate it, and
thank you to our witnesses for being here today. I'll be brief.
Most of my questions have been asked and answered today. So I
appreciate you-all's time and your expertise.
My only question today is yesterday we had our first
hearing and it was focused solely on the threat that's posed by
the Chinese Communist Party.
China is able to innovate and acquire weapon systems for
their military at an alarming rate, much faster than we are, of
course. Frequently, these Chinese weapon systems look very
similar to our platforms or those of our allies and we have
been told, you know, that a large part of that is, you know,
just they don't have the bureaucracy we have. Obviously, they
can get right to the point and, you know, they're gathering
information from us.
So, Mr. Norquist, can you talk to us about the effect of
theft and espionage by our adversaries on our defense
industrial base? What defense--what are the defense contractors
doing trying to defend against these activities and how can we
on this committee help in that effort?
Mr. Norquist. So I think the challenge when you're dealing
with a country like China that is not only able to compete
industrially and build its own technologies but it steals to
stay close, right. Wherever you're headed it's actively
stealing.
There's a number of things that are going on and I'll say
that both between the Department and the industrial base. One
is alerting firms straight up to the risk of their IP
[intellectual property] of when they do business in China, when
they're required to share things, and what vulnerability that
creates so that they don't realize they're just handing
something over.
There's been work to try and protect innovative small
businesses that are developing from having investment capital
coming in from overseas and we have some rules on it.
The second one is protecting individual companies. We put a
lot of emphasis in our association with our membership on
cybersecurity and the point is, yes, the Department is
developing CMMC [Cybersecurity Maturity Model Certification]
cybersecurity standards.
While they're still working through that don't wait on the
standard. Everybody needs to constantly be securing their
network to protect yourself and that's a major area of emphasis
to be able to protect those organizations in that way.
Dr. Jackson. Thank you, sir. I appreciate that.
And with that, Mr. Chairman, I don't have any further
questions. I yield back.
The Chairman. The Chair now recognizes the gentlelady from
Hawaii, Ms. Tokuda.
Ms. Tokuda. Thank you, Mr. Chair.
You know, in the written testimony as presented today--
thank you for being here, by the way--all three of our
witnesses did call attention to the harms imposed by continuing
resolutions and budgetary uncertainty on our defense industrial
base.
You know, last month our country reached our debt limit and
we are now heading towards a potential default sometime early
this summer unless Congress acts. We all know that a default
would be devastating. But even the prospect of default over the
next few months will generate a lot of uncertainty and anxiety
for the industry.
What are the impacts of continued uncertainty around the
debt limit on our defense industrial base, especially small
businesses and our workers? How urgent is it that Congress act
to get the debt limit issue resolved?
Mr. Fanning. I think none of us really knows what would
happen if we don't resolve the debt ceiling issue. But for our
industry and for our members it adds another variable to the
disruptive budgeting cycle.
I mean, we are sort of used to not knowing what the top
line will be, although there's been some consistency lately, or
when we'll get it--when a budget will be passed or how long
the--we assume there's a continuing resolution.
You know, so the best case scenario is it's just a quarter
rather than a year or longer than a year. And this just adds
another variable to that equation that makes it harder to
imagine how we're going to get to the end game. And so it's
more disruptive from a planning perspective for industry.
Mr. Norquist. I'd agree on the comments on the debt ceiling
and those types of uncertainties where people don't know what
the consequences will be for other areas.
But you highlight as well, rightfully, the challenge with
continuing resolutions and it comes up both in the form of hit
the brakes, hit the accelerator.
Service companies, and there's one that we are working
with, they get stop-work orders and so they lay off all their
staff and then wait until the company is confident there'll be
enough O&M to continue and then they get told to hire them
back.
And so you have challenges recovering the workforce. You
have times when the Department did signal it wanted additional
munitions and then they couldn't do the ramp-up for the length
of the CR [continuing resolution]. So that sort of hit the
brake, hit the accelerator is very disruptive and this is just
another example that folks have to deal with.
Mr. Paxton. I concur with my colleagues.
I would say on Navy maintenance and modernization, the
planning that has to go in there is impacted greatly with CRs,
with budget uncertainty. We see starts and fits in that area.
Ms. Tokuda. Thank you.
I want to kind of expand a little bit on that workforce
issue. You know, there has been discussion in exchange for
addressing the debt limit, some have floated perhaps deep
spending cuts to balance the budget, looking perhaps out over
the next 10 years, using fiscal 2022 as a spending level--as a
blueprint.
Now, according to the Committee for a Responsible Federal
Budget, without tax increases that could mean cutting 25
percent of government spending across defense and nondefense
programs and if we left defense and veteran spending off the
table that translates to 33 percent in nondefense programs,
including Social Security and Medicare.
To that end, how would significant cuts in nondefense
programs and health care, education--we have been talking a lot
about workforce and education today--affect our defense
workforce, our ability to attract, develop, and retain the
talent we're going to need to basically innovate and create
critical technologies, fill these jobs?
So, to that end, any response?
Mr. Fanning. I think for our industry--we're aerospace and
defense--there are enormously important investments that are in
the nondefense side of the house, too. But also, as you pointed
out, building a workforce takes a very long time.
Anybody can be like me and decide to be a history major in
college. But if you want to study STEM in college you have to
have had a long track record of science and math to get there.
And so many of these things are important in building the
ecosystem in which we thrive.
But I think, you know, one of the purposes of this hearing
is that we have determined that we have underinvested in the
defense industrial base to have it shaped and poised for what
we need, both now with what's happening in Europe but with any
potential conflict that might happen around Taiwan.
Mr. Norquist. So, I think we all recognize deficits are
real, they're significant, and there are consequences. But we
have also seen what happens with sequestration on what it does
to the Department of Defense, what it does to readiness, and
particularly the cost of trying to come out afterwards, after
we have seen, as was mentioned earlier, those readiness and O&M
cuts go through.
And at the end of the day, your national security should be
tuned to your mission and your requirements, and when those
requirements go down the spending comes down and when those
requirements go up they go up. Otherwise, you're creating
unnecessary future costs to dig out of a hole you've just
created. So, agree.
Ms. Tokuda. Thank you very much, and I think you'll all
agree with me that our people really are an asset. We talk
about supply chain. Our people--our workforce--are part of that
critical defense industry base. So thank you for being here.
The Chairman. The Chair will now recognize the gentleman
from Florida, Mr. Gimenez, for 5 minutes.
Mr. Gimenez. Thank you, Mr. Chairman.
Mr. Fanning, would you--would you say that many of the--
many if not most of the materials and critical minerals that we
need exist in the United States?
Mr. Fanning. Yes.
Mr. Gimenez. Well, I submit to you, Mr. Chairman, that the
problem is us, that we're schizophrenic. We're here in the
Armed Services Committee telling you, hey, we got to get those
minerals and, yet, there are other agencies within the Federal
Government like the EPA [Environmental Protection Agency] that
say, well, you can't get them because they're in some kind of
land you can't touch, just like the Biden administration just
took out, I think, tens of thousands of acres that we know
those minerals are there and they say, you can't touch it.
And so, Mr. Chairman, I think we need to--we need to
determine, okay, whether our national security, you know, takes
precedence. And I'm not saying that you can't get those
minerals without also protecting the environment. You can have
both. I actually believe in a win-win scenario.
Mr. Paxton, when's the last time that the shipbuilders in
the United States built a cruise ship?
Mr. Paxton. We have not built a cruise ship in quite some
time, sir.
Mr. Gimenez. When was the last time you built a
supertanker?
Mr. Paxton. We build a lot of tankers that have managed to
work in domestic trades here in the United States, sir. We did
that all through 2010, through 2012. When there was a demand
signal that we needed to build tankers, we went out and built
tankers.
Mr. Gimenez. Yeah, but I'm talking commercially--for
commercially.
Mr. Paxton. Yes, sir. We don't--we have stepped away from
U.S.-flag, U.S.-built, U.S.-crewed presence in international
commerce, sir, and there's many reasons I could--you know,
flags of convenience, heavy foreign subsidization. There's a
litany of things that have deterred commercial investment in
those areas because it's not a level playing field.
Mr. Gimenez. And because you don't have commercial capacity
then it must hurt your ability to produce, you know, our
capital ships or our Navy ships, right?
Mr. Paxton. Well, I think we do have a commercial
industrial base that still exists. We have laws that say, hey,
if you're going to move product between points in the United
States, you're going to go on U.S.-built, U.S.-crewed, U.S.-
flagged ships and that has benefited that ecosystem, that
industrial base, and we still need that.
I would argue--I would contend we need to think, to your
point, why aren't we in international commerce. You know, we
list the oil export ban with no commensurate requirement that
any of those, you know, national security energy cargoes--LNG
[liquefied natural gas] or oil--go on U.S.-built, U.S.-flagged
ships in international commerce. I would argue that would have
been a good thing to do.
Mr. Gimenez. Fair enough.
And, Mr. Norquist, could you--would you agree that the
problem that we have with our industrial base--I mean, listen,
I mean, I'm new to this committee so I'm just learning.
But it appears to me that what we have is partly an issue
of fleet management and I'm talking air fleet and I'm talking
about tanks and stuff on the ground. And I'm also talking about
the fleet that we don't--you have an issue of inconsistency. If
we were consistent in how we purchase stuff and we always
bought planes and we always bought--had ships and we always had
tanks and we always had all this and you knew that consistently
that you could ramp up to meet that demand, is that something
you would agree with or----
Mr. Norquist. Absolutely. You have both consistency and
demand for production. But you mentioned earlier in
maintenance, if there's a maintenance--and this is most common
in ships--where the ship is supposed to be there on a certain
date and it doesn't arrive there is a consequence down the line
for the readiness of your fleet and other maintenance.
So it is both in the regular maintenance schedule for
equipment and the consistency of what you're purchasing and in
the core quantities.
Mr. Gimenez. Right. Well, look, I used to be a fire chief
and I used to have fire trucks and we'd have--for every online
fire truck, every two online fire trucks, we actually had a
spare, right, so that we'd always be in service.
But there was always time for that fire truck, fire--you
know, ambulance or whatever to be in service. But it appears to
me that what we have now is really an inconsistency in
budgeting. So you can't ramp up and sometimes you ramp up, we
tell you to not ramp down and then that also leads to your
inability to retain talent and workers because, you know,
nobody wants to go to someone that--well, I may have a job for
2 years versus I have a job, right.
Mr. Norquist. That's right.
Mr. Gimenez. Okay. So I guess I answered my own question.
The way to--I guess the way to combat this is to have
consistency in budgeting, consistency in planning, and
consistency in procuring the things that we need as a nation.
And then, finally, you know, I do believe that China is--
what they're doing is undercutting our industrial capacity not
only to increase their industrial capacity but also to hurt us
in time of conflict, to decrease our ability to produce those
things we need if we in fact get into a conflict.
So any comments on that from the three of you?
Mr. Paxton. The only comment I'd make, sir, is we just
experienced it. At the middle of the pandemic you had about a
hundred container ships off of Long Beach and guess what we
ended up doing? Passing the Ocean Shipping Reform Act so we
could stop, you know, getting gouged by international shipping
conglomerates, which were primarily Chinese, and they would
come to our docks, drop off a TEU [twenty-foot equivalent unit
container] that they moved for $15,000--usually it moves for
$1,500--and wouldn't take any of our agricultural commodities
back out. They would go with empty TEUs because it was more
lucrative to take that back and keep our commodities here. So
that's a problem.
Mr. Gimenez. Fair enough. Thank you. I yield back.
The Chairman. The Chair now recognizes the gentleman from
California, Mr. Carbajal, for 5 minutes.
Mr. Carbajal. Thank you, Mr. Chairman.
Mr. Fanning, Mr. Norquist, and Mr. Paxton, thank you for
joining us today.
With the ongoing discussions regarding the debt ceiling and
the focus to control government spending, what can be done
within the Department of Defense or in collaboration with the
Department--the defense industrial base to be more efficient
and effective with the current allocation of funds rather than
continuing to increase the overall top line of the Department's
budget?
Mr. Fanning. I don't want to beat a dead horse but there is
a lot of inefficiency in how we budget and how we respond and
have learned to respond both on the industry side and the
Pentagon side to continuing resolutions. That is an expensive
way to operate year after year after year. That is absolutely
one thing that could make the Department and industry more
efficient.
Mr. Norquist. So, I'll sort of highlight two things. One
is, one place that you find reforms and opportunities for
savings is as you analyze a process inside the Department.
Usually this is something where the Deputy Secretary takes the
lead or a service secretary. They look at a process, they try
and figure out how to automate it or accelerate it, and they
generate savings.
That has happened in previous administrations. I've been
part of--Kath [Kathleen] Hicks just kicked off her effort with
the Defense Management Institute as the current Deputy
Secretary. She's doing a great job there as well as on data
analytics, and so I think the ability of her to try and help
drive internal reforms.
The second is places where for external reasons we hit the
brakes and then we hit the accelerator and so you'll see this
in acquisition, you'll see this with continuing resolutions,
where we tell everyone don't spend in the first quarter because
of CR and then the Department has to spend it all before the
end.
Those are other places where it's more self-inflicted
because we're not even getting the value for the resources
we're putting against it. Those are some of the places that I
would look to try and drive efficiency and reform in addition
to the ones----
Mr. Carbajal. Mr. Paxton.
Mr. Paxton. Yeah. I was just going to say acquisition
strategies that work. You know, we see advanced procurement,
incremental funding, block buys, where we can do that, and we
can see where the efficiencies are, buy that long lead time
material. That'll drive affordability and that's been proven in
a lot of shipbuilding programs.
Mr. Carbajal. Thank you.
Mr. Fanning, in your statement you highlighted multiple
areas that Congress and industry should work together on to
increase the speed of delivering capabilities, one of which is
fixing the budget process.
We have heard the need for a stable funding process and the
need for it to be more agile and responsive to new information
and changing needs.
What do you mean by more agile--a more agile process? What
would that look like? Can we modify the current process or do
we need to start from scratch?
Mr. Fanning. Well, there is a commission looking at the
PPBE [Planning, Programming, Budgeting, and Execution] process.
Dave and I are both on it. So whatever I answer now I have to
say as an individual, not as a part of the commission.
But I think we need to find a way to get something to
program of record and field it faster. We need to figure out
what we have to cut out of the process. We're talking about the
size of the defense industrial base and the barriers to entry
for new companies.
This is a major barrier to entry. The length of time it
takes for a company to develop something, bring it to the
Pentagon, and get it as a program of record exceeds investment
timelines of the--of the private investments that they're
bringing to bear on this.
And so if we're going to be--keep pace or not lose more
pace to China and also try to grow the industrial base by
creating opportunities for new entrants, we have got to find a
way to get the Pentagon process faster.
Mr. Carbajal. Thank you.
Mr. Fanning, a repeated phrase in your statement was supply
chain issues. The approach to supply chain management for the
Department of Defense is typically left to the prime
contractors to manage.
When questioning the Department on why programs are
delayed, a common issue is subcontractor management and other
supply chain issues. I believe the space segment of the defense
industrial base is a great example of limited suppliers of
components and resources, and while the number of suppliers has
rapidly increased over the last few years it's still a budding
market and companies are unable to meet the demand.
This problem became very apparent during the pandemic as
things were starting to get better. Russia invaded Ukraine,
causing another impact to the supply chain. This invasion has
limited the supply to gases that are commonly used as
propellants for electric thrusters and are also used in the
manufacturing of semiconductors.
Are there ways to have more transparency in our
subcontractors and their suppliers so we, the DOD, can have
greater insights into the critical resources required for all
the ongoing development acquisitions and programs in
sustainment?
Mr. Fanning. There are, and government and industry have
been working together on this for a long time to better
understand, add more transparency to the industrial base.
To your point, it's not as big and robust as it might be if
investments were different, if we thought about surge capacity
different, if we thought about the capacity of the industrial
base as a capability in and of itself.
But it really was battered both on our commercial and our
defense side in our industry by COVID and now by inflation.
The Chairman. The gentleman's time is expired.
The Chair now recognizes the gentleman from Alabama, Mr.
Strong, for 5 minutes.
Mr. Strong. Thank you, Mr. Chairman. Thank you, members.
In Defense News' listing of top 100 defense contractors
worldwide, more than 25 percent have a presence in Alabama's
Fifth Congressional District. My district is also home to many
smaller but equally innovative firms that do critical work to
support our men and women in uniform.
As you know, inflation as high as 9 percent in June of 2022
has had a significant impact on the cost of doing business. The
fiscal year 2023 NDAA included clear authority for the
Department to adjust contracts to account for inflation.
Mr. Norquist, what are you hearing from your member
companies regarding the impact of inflation?
Mr. Norquist. So we're hearing a number of things and it
affects different companies differently. So certain contracts
have adjustment clauses in, less of an impact. Firm fixed
price, tremendous disruption.
A small business locked into a multiyear contract that
doesn't adjust for inflation that was awarded right before the
9 percent, all of a sudden they're in a hole.
So we're seeing significant challenges in those companies
because part of what people forget is it's a multiyear defense
budget. So if somebody was awarded a contract prior to the
spike in inflation, fixing 2023 helps 2023 but it doesn't solve
that. And if you're a program manager, you may have been
enacted funds but if you didn't have it under contract you're
seeing bids come in that reflect inflation but your budget
doesn't. So, it hurts both the government and industry.
Mr. Strong. Thank you.
North Alabama is a haven for small and mid-sized
businesses. Many of the small to medium-sized businesses in my
district are moving toward becoming 100 percent employee owned.
While ESOPs [employee stock ownership plans] are successful
innovators in these areas they are unequivocally susceptible to
the valley of death in which promises nontraditional companies
and startups become so successful under small business set-
asides that they become acquired by large defense firms or they
deliberately curtail their own success to retain the ability to
win contracts as a small business.
The FY22 [fiscal year 2022] National Defense Authorization
Act included a provision which developed a pilot program to
support the use of noncompetitive procedures for follow-on
contracts to businesses 100 percent owned by employee stock
ownership plans, also known as ESOP.
Do you believe that making these pilot programs permanent
or potentially expanding the definition of nonprofit to contain
100 percent ESOP S [corporations] would benefit the defense
industrial base?
Mr. Norquist. So, I'm familiar with the provision. I don't
actually have data on how successful those firms have felt they
have been in using it.
But you certainly highlight the big risk, which is when a
small crosses that line, if they don't cross it rapidly and
have follow-on work, we tend to lose a large number of those
small businesses the moment they become medium.
So I do not know how that provision has tracked but I
understand the provision. But you do highlight that line is a
big challenge for firms.
Mr. Strong. Thank you. Mr. Chairman, I yield back.
The Chairman. Thank the gentleman.
The Chair now recognizes the gentleman from California, Mr.
Panetta, for 5 minutes.
Mr. Panetta. Thank you, Mr. Chairman. Gentlemen, good
afternoon. Appreciate you being here.
I kind of want to hit on an area dealing with the
industrial base and our deterrence strategy for Taiwan, if
that's all right, obviously taking into account the lessons
that we're learning from Kyiv and especially looking at the
ample supply of artillery, especially rockets and missiles.
Obviously, in the battle for Kyiv in the Ukraine war
artillery was one of the key things that obviously allowed the
Ukrainians to push Russia back. It also demonstrates that we're
going to need reliable replenishment capabilities to deter and
defend against any amphibious assault towards the island of
Taiwan.
Now, that includes several tabletop exercises, for what
this is worth. In those exercises the United States depleted
critical, long-range precision-guided munitions in less than 1
week in a Taiwan Strait conflict.
So it seems that based on what we're seeing in Ukraine, if
the U.S. were to be involved in simultaneous major theater
wars, what do you think would be the most urgent hurdles to
address and provide the capabilities such as artillery when
called upon?
Go ahead, Mr. Norquist, please.
Mr. Norquist. So I think, first of all, there's a number of
studies on this. CSIS [Center for Strategic and International
Studies] did a particularly good one on this very issue, and so
when you look at--and different theaters are different, right.
When you look at the Pacific you're looking at
extraordinarily long ranges between platforms and so long-range
missiles would easily be high consumption rates. Munitions--
those types of items in a high-end conflict do get consumed at
much higher rates.
So those are the ones that you'd need to focus on as well
as how to get them into theater, right. That's the other
challenge, is it's a long way to Taiwan and trying to resupply
during a conflict is a very complicated process.
Mr. Panetta. And then I'm going to follow up on this
especially on something like that, looking at the island nature
being how it'd be subject to blockades as well. You know, how
would that affect your analysis?
Mr. Norquist. Well, it puts a premium on whether it's there
in advance, right. Foreign military sales to Taiwan where they
have it prepositioned is dramatically better over trying to
move it during a moment of intense conflict, and making sure
they're investing in the right types of defenses.
As somebody has often described, if Taiwan makes itself
more like a porcupine, this is a very difficult thing to do an
amphibious invasion against. But they've got to be able to put
those investments in there.
Mr. Panetta. As you know well, our NDAA in 2023 established
multiyear contracts for some munitions that have been pretty
critical for Ukraine and may be useful in our fight over Taiwan
if that--if it comes to that.
Do you believe that the multiyear contracts would help
bolster stockpiles by creating the demand signal for defense
companies to produce goods that could be used in a protracted
war while also potentially expediting the production and
transfer of certain munitions?
Mr. Norquist. Absolutely. The multiyear contract is a very
valuable signal because it's more than a signal. It's actually
a contract, right. It tells them build this because we have a
need.
And then there are things one can do to move beyond that.
There's some authorities this committee included that helps
accelerate through some of the administrative side. You always
have for long lead items the tool of advanced procurement,
which we use with airplanes and others on a regular basis. So,
there's a number of tools to make it go faster but multiyears
are absolutely a valuable step in this direction.
Mr. Panetta. Mr. Fanning.
Mr. Fanning. I would go back to consistency on this, too. I
mean, having seen this--all of us have, years over years over
years--munitions are often a bill payer in the end game when
you're putting the budget together because of the granularity
of being able to say, well, we'll take 20 percent risk on that.
So if you want that industrial base capacity and capability
there has to be consistent, determined investment in it over
time. And we're talking about surge capability. You're now
talking about stockpiling and then prepositioning, too, which
is a whole different thing when it comes to Taiwan.
But to have that capability to surge requires a consistent
long-term investment. But one thing on block buys or multiyear
contracts is it's running up against inflation, we're finding,
in two different ways. One, suppliers are not wanting to bid 5
years out because they just don't know what inflation is going
to do.
If we get them to, if the big companies get the suppliers
to do that and we take the contract to the Pentagon, the
contract officials get anxious about a contract that has so
much escalation in it over 5 years. And so we still have a lot
to figure out on how to deal with inflation, especially over
some of these long investments.
Mr. Panetta. Thank you. Thank you, gentlemen.
Mr. Chairman, I yield back.
The Chairman. The Chair now recognizes the gentleman from
Florida, Mr. Waltz, for 5 minutes.
Mr. Waltz. Thank you, Mr. Chairman. I'll open this up to
anyone who wants to answer on the panel.
CSIS recently ran a war game that showed us falling
significantly short in the Indo-Pacific theater on a Taiwan
Strait scenario.
I know you're not currently still sitting in your former
positions. But to your knowledge, do we have enough forward in
terms of stockpiles and munitions to sufficiently win or--and
we can--we'll set aside the debate of what victory actually
looks like, but sufficiently deter and then win should we have
a conflict in the Indo-Pacific?
Mr. Fanning. Yeah, I'm not current on what we have
prepositioned. But I think what we're seeing in Ukraine makes
the answer pretty clear that we don't and a part of that is
because we are postured in so many different ways for peace--
how we budget, the processes, the capability and capacity that
we maintain, and then, of course, what we stockpile.
So I think the answer is pretty clear from what we see----
Mr. Waltz. How do we sufficiently incentivize industry,
right? On the one hand, we don't want to create a bunch of
things we never use. On the other hand, we--you know, we have
to balance modernization with investing in the legacy systems.
Do you have any recommendations, and I'll take them for the
record, on how this committee can be helpful there with
industry?
Mr. Fanning. There are a number of ways you can send
signals--strategies, budgets. Industry looks at all of those
and looks for some consistency into the future so that the FYDP
certainly helps with that.
But, ultimately, to really guarantee it because, again,
industry will want to get out front of a contract but it's the
contract that really cements it into place for the long term.
[The information referred to can be found in the Appendix
on page 128.]
Mr. Norquist. I would only add the Department needs to
understand in its wargaming and modeling the same type of
results that CSIS saw in their study and then change the
requirements, right.
You do that and then you start putting it in your budget
and your plans, and now you are receiving from the Department
the demand signal that the Department is showing of we intend
to buy these in quantities over time.
[The information referred to can be found in the Appendix
on page 128.]
Mr. Waltz. Was CSIS too dire? Were they too--did they take
too many negative assumptions into their war game, I mean, from
the----
Mr. Norquist. I would not assume so. Now, again, I don't
know the Department's analysis and if I did I'd probably be
stuck behind a classification challenge.
But when you look at high-end fights we traditionally find
they vastly consume more munitions that one would think they
would. Just the intensity of the battle are very different than
counterterrorism type of operations in the sheer volume.
And we cannot assume the sort of, well, we'll do like World
War II and once it starts we'll ramp everything up and we'll
catch up over 3 years. We have to be able to position and
prepare more carefully than that, given the nature of our
modern industry.
Mr. Waltz. I'd be interested in your thoughts for the
record on how to actually help the Pentagon do that.
[The information referred to can be found in the Appendix
beginning on page 129.]
Mr. Waltz. In that same vein, do we have the stockpiles of
parts for many of these high-end systems, for example, Joint
Strike Fighter, to conduct combat repairs? We have those PLL
[prescribed load list] lines forward? Any type of cache
environment--cache environment?
Mr. Norquist. I don't know the status of the forward line
on the repairs for those so I wouldn't be able to weigh in at
this point.
Mr. Waltz. Okay, thank you.
And, finally, from a shipbuilding perspective--I mean, just
to set the table, China has 50 shipyards that could fit a
Nimitz-class carrier. We, arguably, have two to four that are
incredibly old.
The largest shipyard in China could fit all of ours and
combined. I think their roughly 50,000 commercial vessels
compared to our 5, many of which they can nationalize and
militarize.
I don't believe there was any money in the bipartisan
infrastructure deal, the once in a lifetime deal, that the
President was pounding the lectern about just last night, for
shipbuilding, to my knowledge.
Mr. Paxton, do you have any comment there?
Mr. Paxton. Certainly, there was not a comment on that.
There is the SIOP [Shipyard Infrastructure Optimization
Program] that's investing in our----
Mr. Waltz. Is it sufficient? $20 billion over 20 years when
we have an intel community that's blinking red over the next 5
[years]?
Mr. Paxton. I certainly think our public shipyards need
help. I don't represent them. They're not part of our group.
To your previous question, though, this committee did
authorize recapitalization of the National Defense Reserve
Fleet, which to your point about Taiwan we do need logistics.
We do need auxiliary vessels to sustain the fight and we really
don't have that right now in our----
Mr. Waltz. Could we use Jones Act fleet hardening,
militarizing, perhaps upgrading a portion of that to then
almost like a Civil Reserve Air Fleet? You think that's a
viable concept? I'm out of time but if you could answer for the
record that would be great.
Mr. Paxton. Well, yeah.
[The information referred to can be found in the Appendix
on page 130.]
The Chairman. The gentleman's time is expired.
The Chair now recognizes the gentleman from Minnesota, Mr.
Vasquez, for 5 minutes.
Mr. Vasquez. Thank you, Mr. Chairman. I think the letters
in my State got transposed and it's New Mexico, but not a
problem. Just a little bit different. But thank you, Mr.
Chairman.
Today's hearing examining the defense industrial base is
incredibly important to New Mexico and to my district. New
Mexico, as you know, is at the forefront of national defense
including research, development, and testing of some of the
most critical technologies and programs that keep the United
States safe.
The defense industrial base is also an incredibly important
economic engine and potential for economic development in the
rural areas of my district. A study by the University of New
Mexico showed that the State's military bases alone in New
Mexico generate $3 billion in wages and supported more than
52,000 jobs.
But there is opportunity to do more, not just for our
national security but for the benefit of our local economy.
Now, Sandia and Los Alamos National Laboratories research and
develop some of the most advanced technology in the world,
technology that is often transferred to the private sector to
be commercialized where it supports thousands of jobs and
generates millions of dollars in revenue, not just for my State
but for this country.
At White Sands Missile Range we are undertaking essential
work to modernize our military including testing hypersonic and
long-range systems. If we can invent it in New Mexico and test
it in New Mexico we can build it in New Mexico. That's my
theory.
Co-locating elements for our defense industrial base in a
State like New Mexico that is so rich in the research and
testing assets can have the benefits that we need in this State
and across our economy from those good-paying jobs in
manufacturing to stronger educational pathways and training
programs to help fill our workforce gaps.
Mr. Fanning, in your opinion, how can we leverage the
resources of a State like New Mexico to grow the defense
industrial base where we have opportunity, we have willing
participants to enter the workforce, and the key elements such
as the national labs and testing ranges?
Mr. Fanning. Well, I think we see all over the country
where there are pockets where investment has grown up in
aerospace and defense, for obvious reasons.
I think there are probably two key aspects to this. One is
workforce. Companies will go where the workforce is and so
State and local investment in education, in apprenticeship
programs, in STEM education, makes a big difference because
that's really the critical element for our industry right now.
And then the other is just what other economic investments
that the local or State governments are willing to make. But I
think making sure that you have that educational STEM pipeline
is one of the most critical things to make sure that you have
the capacity to keep growing in a regional area.
Mr. Vasquez. And, Mr. Fanning, how can the private industry
and part of the--private part of the industrial base help
support investments in education to help spur this workforce in
places like New Mexico? What is the role, do you think, there
for private industry?
Mr. Fanning. There's a lot that private industry does to
try and make up that gap. We have a large aerospace company in
Kansas that recruits off of farms because they at least are
thinking they're finding people that know how to work with
heavy machinery. They're in the schools. They're doing their
own apprenticeship programs. They're leaning far into this
because of the problems that workforce has.
When they find a willing partner at the State and local
level it just makes it that much more interesting and you can
see places around the country--Alabama, Colorado--where you
have these pockets where all the different stakeholders come
together and they've had some success at growing organic
capability.
Mr. Vasquez. Thank you, Mr. Fanning.
And I just want to put a plug in for New Mexico State
University. We used to have an aerospace engineering degree.
Financially couldn't sustain it and now this was before we had
the first purpose-built spaceport--commercial spaceport in the
country in Spaceport America north of Truth or Consequences,
New Mexico.
But that potential pool of talent that we have there with
the resources that we have in the Federal Government that also
helps support a host of engineering jobs is a place that I
think industry should continue to look to help create this
pipeline of STEM jobs.
Mr. Norquist. But you mentioned the interesting combination
of a test range, universities. You talked about things like
hypersonics. There's a series of emerging technologies in these
areas that are going to have unusual sort of challenges to
solve.
So, for example, in our association we have set up an
Emerging Technology Institute that's working with universities
to be able to do those types of things and the emphasis on do
you have enough test ranges so when these new technologies like
hypersonics come online you can take advantage.
I really appreciate your leadership in this area. But this
is something we from an association side recognize as a key
need, going forward, is to bring those players together.
Mr. Vasquez. Thank you, Mr. Norquist.
And for my last question what role does immigration have to
play in helping to fill some of the gaps that we currently have
in the STEM workforce at places like Sandia and Los Alamos in
New Mexico?
Mr. Norquist. When you get legal immigration with STEM
skill cells, I mean, this is the cheat code the United States
has over the rest of the world is our ability to attract people
from everywhere else and bringing them into the country is a
huge help. It builds the workforce pool, and even if they don't
go into the government because it's classified, the fact
they're in the pool helps produce it and benefit everybody.
The Chairman. The gentleman's time is expired.
The Chair now recognizes the gentleman from Texas, Mr.
Fallon.
Mr. Fallon. Thank you, Mr. Chairman. I appreciate it.
Mr. Norquist, as the representative of Red River Army
Depot, the Center of Excellence for tactical wheeled vehicles,
I'm particularly sensitive to the needs of the defense
industrial base and the Department's organic industrial base.
While the commercial industrial base builds the systems we
all know that we use, the depots--arsenal, shipyards--are
responsible for maintaining these systems and ensuring that
they're ready for any future conflict.
If it doesn't do--it doesn't do a lot of good to have a
shiny new Corvette in the driveway if you can't maintain it
because it's going to be a flash in the pan. You'll have fun
for few weeks there. Then you're going to be having a little
trouble.
Over the last several decades we have seen time and again
when the life of a particular system is extended well beyond
its original intent it's always a benefit to the taxpayer and
to our national security.
This can be necessary based on the types of conflicts that
we're in, moving forward, because of the delays in new
programs. The Army is currently undertaking a 15-year OIB
[organic industrial base] modernization implementation plan for
our depots to improve capabilities and leverage with new
technology while saving the taxpayers millions.
Sir, based on your experiences in both the private sector
and in the DOD, what do you see is the values of depots and
what capabilities do they provide the DIB to meet and maintain
our military's readiness requirements?
Mr. Norquist. So you've highlighted--there's a couple of
key ones. The first is on the regular equipment, having it up
and ready so that it's available for the warfighter when they
need it, right, that's the key thing.
If you don't have maintenance and you've got--and we have
seen the damage when the Russians tried to go into Ukraine with
equipment that clearly was not well maintained. The devastation
of poorly maintained equipment on a war plan is catastrophic.
So the first and foremost is have the current capability
ready. But as you point out, they produce a second option,
which is when--if it's to your advantage to extend the life of
a platform because its capability and design makes it possible,
you're looking to those depots to make that possible, to be
able to redesign or reengineer it, to swap out the parts that
don't have that life extension with ones that do, and they give
you a whole new set of choices which are valuable to the
government and their decision makers.
So both the readiness of the current force and the options
of how to equip the future force are two of the core functions
that the depots provide.
Mr. Fallon. And, sir, if I could do two follow-ups. What do
depots provide the private--that the private sector can't? And,
in your opinion, how could we better utilize these depots,
which are really critical, to alleviate some of the strain on
the DIB that we have been talking about all hearing?
Mr. Norquist. Well, I think each of the--the public and the
private sector each play a role to be able to address certain
types of challenges and it depends on the nature of the
requirement which one they use, and there are many firms that
work with private depots in order to help them perform their
mission so that the combination of government and industry is
apparent wherever you go.
And so I think the question is when the government decides
what its requirement is, which are the issues it's trying to
solve and which is the best setup in order to achieve those.
Mr. Fallon. Thank you, and I think my colleague was
mentioning about what impact does immigration have in STEM. I
liked your answer and I think I want to emphasize that you said
legal migration is a benefit to the country.
I don't know any members on my side of the aisle that don't
agree with that statement that legal migration is a benefit to
the country, a net benefit, moving forward.
So thank you very much, Mr. Norquist and the witnesses. Mr.
Chairman, I yield back.
The Chairman. The Chair now recognizes the gentlelady from
Virginia, Ms. Kiggans, for 5 minutes.
Ms. Kiggans. Thank you, Mr. Chair.
This question is for Mr. Paxton. I represent Virginia's
Second Congressional District so it's home to the Atlantic
Fleet and to a lot of our shipbuilders and ship repair
industry, and just meeting with the ship repair industry, we
have BAE, NASSCO, Colonna, MHI, a lot of the big--the big guys.
And in talking to them about retention of their workforce--and
you all mentioned just workforce challenges--and they said the
biggest problem for them is just the lack of predictability for
acquisition or--that acquisition or repair cycle because it's
inconsistent funding for them.
So they are frequently having to spend millions of their
own dollars in keeping their staff when really this should be
funding that the government provides or at least let's get them
a more predictable schedule.
So what can we do or what can this committee specifically
do to improve that process for them?
Mr. Paxton. Yeah. I think it starts with having that
maintenance and modernization plan where we know what's in that
FYDP, what's going to happen over the next 5 years so the
industry can plan for it because certainly industries in your
district have invested heavily in their facilities and
workforce.
But they've also--maintenance and modernization goes
through a lot of ups and downs, you know, issuing WARN [Worker
Adjustment and Retraining Notification] Acts, and then they're
letting folks go. And one little fact about the shipyard
industry is when we try to get somebody in our trades, they go
through their apprenticeship programs, they do all that great
stuff, and they get certified and they're a welder or they're a
machinist or electrician, that's enormous. And I think Mr.
Fanning said it earlier that once you've had an apprenticeship
program you have kind of a sense of belonging.
When we have to let these workforce go because we're--flows
don't come into the home port like they were predicted, that
tradesman was going to be a project manager, you know. But it
takes about 5 to 8 years for that to happen. Or a supervisor.
And a lot of the guys in our shipyards are generational.
They've had a mother or a father that's worked there and they
want a career, and we have careers. You can start in the trades
and you can move into management and you can move up.
So when we have instability in the work forecasts going
into the home ports, the real disruption is with that workforce
and then with the supply chains. And so I'm not sure I'm
answering your question precisely but our workforce is
incredibly important down there. The work that the Virginia
Ship Repair Association does is amazing and they're a strong
supporter of what we do.
Ms. Kiggans. Yes. And we're happy to have them.
And along those same lines with workforce challenges--and
this isn't really a question, more of a comment--but just
incentivizing our veteran population. You know, those guys
understand the work ethic. They understand the work culture.
They lived on those ships. They want to take care of those
ships.
So I know we have done a lot of work on the State level,
especially in Virginia, about trying to transition those guys
from Active Duty into how can they serve in repair and
shipbuilding. But I definitely think we need to put more of a
focus on that group.
But my next question is about the smaller shipbuilding
companies. So we've got the big boys but we also have a whole
lot of smaller ship repair companies and these guys are--they
play a pivotal role in just providing maintenance and that
surge capability that we talked about that's so important.
So the complaints from those guys is that they are being
neglected and the bigger boys are getting a lot of the
business--the majority of the business.
So I want to look out for the small guys, too, because I
need them when we need them the most. So what can we do to
ensure that the small guys are taken care of as well?
Mr. Paxton. Sure. I think there is requirements that have
been issued where we do have small business set-asides where
work is pushed that way. I know a lot of our small ship--
smaller shipyards do a ton of ven--vendor work with our primes.
So there's great relationships there and they all work
together.
I think also there's unique circumstances where the smaller
shipyards have fixed firm contracts so when inflation and all
these things have come in and material costs have changed
they're getting--they have to absorb those costs a little bit
different than the prime.
So we got to look at that as well and see how we can help
those shipyards weather a very different environment than we
were living prepandemic.
Ms. Kiggans. Thank you. Thank you. I yield back.
The Chairman. The Chair now recognizes the gentleman from
North Carolina, Mr. Davis, for 5 minutes.
Mr. Davis. Thank you so much, Mr. Chair, and thank you to
each and every one of you.
I have a quick question for Mr. Norquist in particular. I
represent Eastern North Carolina's First Congressional
District, which we have enormous challenges. But my question is
how can we encourage in particular in economically distressed
areas small and mid-sized businesses in particular to compete
to provide us with the best and strongest national defense
possible?
Mr. Norquist. So there's a couple of ways. I mean,
certainly, there are certain government programs designed to
promote them.
But I think one needs to go beyond that and so one of the
things, for example, our association does is to try and have
events where people can come together. So organizations who
have a company in your district who don't necessarily have
those connections can come to events, meet people from the
other companies, explain to them what their product does, what
their company does, in order to build those.
We have--the majority of our membership are small
businesses and it's the ability to meet with the government
buyers and to meet with other vendors. That is why they attend
and bring them together.
So I think those are the sort of things we do precisely for
the benefit of those types of organizations and companies.
Mr. Davis. Okay. Thank you so much for that.
Mr. Fanning, hearing back home about the logistical
challenges faced specifically by the Fleet Readiness Center,
East Cherry Point, North Carolina, they face enormous
difficulties recruiting a stable workforce and acquiring
resources to guarantee timely repairs for our military
[aircraft].
From where you sit, how can Congress, how can I,
representing this area, work in partnership with DOD to
maintain a stable base of support for facilities like this,
like the Fleet Readiness Center in my region?
Mr. Fanning. Well, I think, first of all, consistent
budgeting. You know, companies or organizations that aren't
working don't get paid for it, which is the first quarter of a
fiscal year typically, and then they're asked to surge to make
up in three quarters of a year or half of a year what they
weren't doing in the previous part of the year.
That's more expensive because you're paying overtime and
labor. So, anything that can be consistent in the budgeting
process that allows any institution, government or industry, to
plan and have consistency for its workforce is sort of a
fundamental aspect, I think--a critical part of being able to
maintain a steady workforce and provide some assurances to that
workforce.
Mr. Davis. Okay. Thank you so much. Yield back.
The Chairman. The Chair now recognizes the gentleman from
Guam, Mr. Moylan, for 5 minutes.
Mr. Moylan. Thank you, Mr. Chairman.
Mr. Paxton, with Guam and other outlying regions of the
United States being geographically removed from much of
America's industry core, what capabilities exist or would you
recommend to service our military hardware with this huge
buildup, especially in the Indo-Pacific area, because of our
threat, and recommendations specifically for our Navy vessels
in Guam and other outlying areas of the United States?
Mr. Paxton. Well, certainly, we care a great deal about the
maintenance and modernization of our vessels in the Western
Pacific, so be that Hawaii and Guam, we want to see work done
there and be stable.
Beyond that--I'm not trying to avoid the question but I'm
just trying to think, more so our assets in Guam and I just
don't have the ton of visibility on that. I don't know if I can
defer to my other two colleagues.
Mr. Norquist. Well, I think, first of all, you have to
recognize that, given the pivot to the Pacific and given the
challenge, Guam moves from being on the periphery to being in
the dead center of the conversation, right.
When we talk about distances of supplies to the Pacific you
have a distance of some kind of just--the distances from Guam
are very different. And so being able to store things, being
able to maintain things, all of those functions, when they can
be safely done forward tremendously change the calculus.
So I think there's a different answer over the--with the
two new strategies we have seen about how central a role Guam
is to the mission and to its ability to sustain the mission.
So I think this is a great conversation to have with the
Department about what can we do here--so that if you think
about it the Department has to move it all the way across
during a conflict. They're putting people at risk that entire
journey. If it's already there then you say bring it home, fix
it, bring it back.
So the question is what are the assets that are best
supported there. Those I don't know from a military mission
point of view, but, clearly, its location dramatically changes
its value in this situation.
Mr. Fanning. I'd say the same thing. We talked about the
volume of munitions you use is always more than you plan. The
duration of an engagement is more than you plan as well, and
being able to sustain equipment--ships in this case--closer to
the fight means that they're available more and for longer
periods of time.
So I agree with David that Guam becomes much more
interesting as we--geographically as we think about planning
and pivoting our budgeting and our programming and what have
you towards something that's in that region.
Mr. Moylan. Excellent. Thank you very much. Thank you, Mr.
Chairman. I yield my time.
The Chairman. Yeah. That is a really critical area for us
to focus some attention. Guam is going to be in the center of
everything as we move into the INDOPACOM [U.S. Indo-Pacific
Command] and we need to be thinking about these things now and
making sure we're prepared before conflict rather than
regretting that we didn't.
You know, when we went into Afghanistan 20 years ago, and
Iraq, we really realized how unprepared we were as a nation and
I remember my first--that's when I first got here--and our
first 2 years we were resolved to never let that happen again.
Well, you know, we need to be thinking about and I would
like for you all to be thinking about how we can bring our
partners into that process to make sure Guam is fully prepared
for whatever may come in the not too distant future.
With that, I'd like to recognize the gentleman from
Florida, Mr. Mills, for 5 minutes.
Mr. Mills. Thank you, Mr. Chairman. Thank you, gentlemen,
for being here today to testify. Thank you, Mr. Fanning, for
your service.
As a Bronze Star recipient, military combat veteran, and
also a former owner of three different defense businesses, I
own one of three companies in the United States who had a unit
capacity monthly of 150,00 to 200,000 A5 warhead pressed
M430A1s, 433s. I can tell you, and I hope that you would
agree--and please, if you don't, let me know--that energetics
in our supply chain and consistency has been a real stronghold
against the U.S. business stream. You know, I'm a big fighter
for the idea of not just getting our military industrial base
stronger but also to ensuring consistency.
We joke in the industry that the only consistency we have
is inconsistency and I think that remains true. But I think
that also there's other factors. The DDTC [Directorate of
Defense Trade Controls] sometimes has been politicized in many
ways, which prevent our DSP-5s and DSP-83 approvals; BATF-E's
[Bureau of Alcohol, Tobacco, Firearms and Explosives']
overregulation, sometimes with our Form 2, Form 9s being held
for a prolonged period of time; raw material costs due to
inflation; and the fact that we don't control enough of our
actual at-home production. And that's something I really want
to work with you guys in the industry as well as for within our
committee, is to make sure that we bring more here at home when
it comes to our ability to build, supply, and conduct our own
LATs [lot acceptance tests], LAPs [load, assemble, and pack].
But I would also note that workforce shortages is, while
it's a big factor, we also acknowledge the fact that in many
cases industries like ours doesn't exactly have the most
desirable locations to live in whether it's Texarkana, which
some might find less appealing, Perry, Florida, or many of the
others. And so I do understand that importance when we're
trying to get STEM qualified individuals.
But I've also noticed, and it wasn't noted in any of your
testimonies, the issues within the banking industry's
appetites. I have seen multiple times where small, medium
businesses in the defense industry can't actually get the
necessary advance payment or performance bonds because there
are a lack of banks with an appetite to support the defense
industries.
And I wanted to just ask really quickly do you find, in
addition to the overregulation, that the banking industry's
appetite to support the defense industry is also hindering us?
Mr. Fanning. I'll start. We were seeing that in Europe
before the invasion of Ukraine and then watching very closely
here in the United States a number of movements. But that was
one of them. Defense--the defense industry in Europe was really
struggling increasingly to find financing for that exact
reason.
We weren't seeing it here as much and I would say the
thing--the tide has changed dramatically in Europe in the last
year and so I think that will help over here with the industry
to include small businesses. But we weren't seeing it leap over
the Atlantic to the degree that it was happening in Europe, and
we were watching it pretty closely.
Mr. Mills. And if I just may really quickly, where I'm
seeing the biggest thing, I think, with the banking appetite
isn't necessarily in the larger businesses. I find it in the
smaller and medium-sized businesses that haven't gotten that
established revenue where the bank will overlook the risk
simply based on the billions of dollars that are coming in in
defense. And so I think that's somewhat going on but perhaps at
a lower level that your industry or your association isn't
necessarily representing.
Mr. Fanning. I think that speaks to the inconsistency we
have been talking about----
Mr. Mills. Correct.
Mr. Fanning [continuing]. Particularly for small businesses
in the defense industrial base, and now you have inflation on
top of that because as we have discussed the supply chain is--
it's not walled off for the industrial base. It's shared, and
in inflationary times there's all sorts of incentives to move
to a commercial side.
We have companies that are not getting deliveries from
their suppliers who are willing to pay the penalty on the
defense side because due to inflation they can get more even
with the penalty by delivering either all or some of what
they're due to the defense companies to a commercial client.
Mr. Mills. And I just want to get through a couple of these
questions. You know, one of the things I look at that is really
important as a congressional Representative is to be a good
steward of taxpayers' money.
Now, I'm all for ensuring readiness and making sure that
we're more than equipped to handle the upcoming threats that we
face. But I also understand that under the Federal acquisition
regulations when we look at free and fair and open competition
we have things that have troubled me for years, which is things
like BAFO [best and final offer].
When we talk about the best and final offer we'll look at
three or four companies, and perhaps one company because they
have a better supply chain reliancy, because they do a lot more
in-house, things like this, they fall outside of this 20
percent competitive range and therefore they're automatically
disqualified even though they are a cheaper and a same quality
as the others that are there.
Do you think there needs to be a bit of a change to the
procurement regulations as well and how we do that?
Mr. Norquist. So I think in some cases there may be a
change. In some cases it's the application, right. In many
cases, there's the flexibility to properly account for the
various strengths that different bidders can bring to the table
and does the acquisition community make a point of valuing
those.
And we pointed to earlier the resilience factor is going to
be of greater importance and the acquisition community needs to
look for that in its bidders to be able to say, I recognize
this bidder brings greater resilience to this project than the
others and so that would matter.
The Chairman. The gentleman's time is expired.
The Chair now recognizes the gentleman from Georgia, Mr.
McCormick, for 5 minutes.
Mr. McCormick. Good afternoon, gentlemen. I'm sure you're
excited to have my questions since I'm at the tail end of this
discussion. Thank you. This has been enlightening.
In regards to what the Chair just recently brought up and
in quoting this book, which I'm sure you guys are familiar
with, it's basically the 2023 Center for Strategic and
International Studies wargame ``The First Battle of the Next
War.''
They identify, and I quote, ``military planning appears to
assume that U.S. forces will be able to deploy onto sovereign
territory of other countries during a crisis. In particular,
the Army and Marine Corps seem to assume that the MLRs [Marine
Littoral Regiments] and the MDTFs [Multi-Domain Task Forces]
will be prepositioned in the Philippines, Taiwan, or on four
Japanese islands before the conflict begins. However, such
permissions for forward deployments en masse do not seem likely
due to immense destruction the conflict would cause.''
They aptly noted that there is, therefore, the potential
for a fundamental disconnect between U.S. war plans and
political realities. I would make the case that we're doing the
same thing as we plan and we prepare our forces, including my
beloved Marine Corps, as we plan for prepositioning people on
islands and chains, we don't really would have access to if a
war actually began.
And are we preparing for the right battles? In other words,
we have to have--we have never predicted a war yet correctly.
We always end up in these conflicts we didn't anticipate, and
if we put all of our development in our defense into baskets
which we think it's a massive war but we end up fighting all
these other peripheral wars, are we, indeed, in your opinion,
preparing for the variety of wars we could face in the future
or are we just really focusing too much on one theater?
Mr. Fanning. It's hard, obviously, to gather a fulsome set
of lessons from unclassified wargames, although this was a
pretty comprehensive set of games.
But I think if we look at what's happened the last year in
Ukraine we should all be questioning all of our assumptions
about planning but particularly if we're looking at a Taiwan
scenario.
Mr. Norquist. I think when you look at a conflict if you
assume a solution or a problem you have clearly misunderstood
and not done enough history, right.
What you look for is what are options and do I have the
capacity to take advantage of them if they present themselves
and what are the risks. There are certain things you can't
assume you will have and then if I don't, well, then I can't
fight because you may discover that's exactly what you can't
have.
So one of the challenges in going through this and
wargaming is what are the things that I should assume I might
not have and do I have an ability to work around that, and what
are the things that if the window presented themselves I could
take advantage of.
But as you point out, if you make too narrow a set of
assumptions and everything breaks your way, you're not prepared
for when they don't and typically they don't.
Mr. Paxton. The only thing I'd add is from the standpoint
of logistics and sea lift we need to get on to the business of,
you know, service life extensions, buying some foreign aspects
of our Ready Reserve fleet, and then building purpose-built
ships that are going to be able to sustain and provide the
logistics that we need.
Mr. McCormick. Fantastic. Well, I'm looking forward to
learning tons more on how we can streamline the process for
both what we're facing now and into the future.
With that, I yield, sir.
The Chairman. I thank the gentleman from Georgia.
I thank our witnesses. You've been very helpful. I
appreciate your preparation and your time today.
And with that, we are adjourned.
[Whereupon, at 1:31 p.m., the committee was adjourned.]
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A P P E N D I X
February 8, 2023
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
February 8, 2023
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DOCUMENTS SUBMITTED FOR THE RECORD
February 8, 2023
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WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
February 8, 2023
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RESPONSES TO QUESTIONS SUBMITTED BY MR. ROGERS
Mr. Fanning. The transition of critical supply chains to
alternative sources takes considerable due diligence, time, and
resources, and suppliers need clear systems and flexible policies that
reflect this reality. Without ample transition time, critical supply
chains could be disrupted, particularly as some critical materials come
from sole sources. Our sector is moving with a sense of urgency to
identify alternative sources for the range of critical materials, and
we're working domestically and internationally to secure our supply
chains.
There are some existing policies that make materials processing
supply chain resiliency even harder and should be reexamined. Tariffs,
like section 232, on critical materials from allied countries,
particularly when no domestic sources are available, is an example. The
specialty metals supply chain relies on steel and aluminum as key
inputs in a variety of downstream products and has been adversely
impacted by price increases stemming from tariffs--leading to supply
interruptions, cost increases, chilled development, and loss of
competitiveness of both defense and commercial product lines within the
aerospace and defense sector. Congress should consider repealing
section 232 tariff on these goods. [See page 30.]
Mr. Norquist. NDIA and our member companies are equally concerned
that the U.S. is so heavily reliant on the People's Republic of China
(PRC) for rare earth minerals due to the threat this reliance poses to
U.S. national and economic security. We commend the work already done
by Congress and the Department of Defense (DOD) to encourage the
development of additional sources of domestic and friend-shore
production.
To transition to a larger percentage of preferable sourcing for
rare earth minerals, such as in the United States or from U.S. Allies,
it is necessary to first recognize the barriers currently preventing
this transition: current U.S. environmental regulatory challenges and
the length of time needed to complete such a transition. These two
barriers drive up-front business costs, measured in terms of financial
cost and in lead time, for new sourcing of rare earth minerals.
Commercial price, in the global marketplace, is the main driver of
where materials are sourced. Low-cost producers, particularly the PRC,
do not have workforce safety or environmental protection regulations.
This allows government-backed industries in China to sell at lower
prices and to dominate rare earth supply chains. This is part of the
PRC's strategic and disciplined industrial policy to decrease its
reliance on the international economy while increasing the dependence
of the U.S. and other countries on China's industrial production
capacity. As a specific example, the PRC has made the necessary
investments to control lithium-ion battery supply chains.
Moving processing to the United States or to U.S. allies would
require addressing the impact the Environmental Protection Agency
(EPA)'s current regulations have on the cost of U.S. domestic
production and processing of rare earth minerals (as well as Allies'
equivalent domestic agencies). In addition, it would require
significant commitment to gain buy-in from local communities where
mines would be opened. Finally, it will require policy consistency due
to the length of time between authorizing a mine for extraction and
actual extraction and processing of the minerals. For these reasons,
unless these current barriers are adequately addressed, it is unlikely
potential U.S. producers will be able to secure the necessary financing
from banking institutions.
NDIA recommends that Congress support legislation to provide
necessary changes to current authorities and to increase funding to
encourage investment in domestic and friend-shore rare earth mineral
production. This legislation could include:
Using Defense Production Act (DPA) and tax incentives to
encourage U.S. commercial companies to fund development and operations
of domestic mineral sources.
Establishing long-term agreements with raw materials
suppliers to create investor confidence in order to get private
investment funding.
Encouraging the EPA to improve the current permitting and
regulation process. In addition, NDIA recommends Congress engage with
DOD to determine the Department's strategy to qualify current and
emerging suppliers to receive support through DPA.
For a more complete perspective of what Congress could do to
encourage U.S. rare earth mineral production, NDIA would be willing to
convene a forum with a number of suitable member companies who could
share their expertise and perspectives on the issue with Congress.
[See page 30.]
Mr. Paxton. We are working with SCA member companies to better
understand how their businesses are impacted by the market for rare
earth minerals. [See page 30.]
______
RESPONSES TO QUESTIONS SUBMITTED BY MR. WALTZ
Mr. Fanning. Policymakers throughout the federal government must
recognize that many new technologies and innovations are being
developed commercially or in the private sector. DOD is not presently
set up to harness these technologies quickly and efficiently for
government and military use. For many years, AIA has supported
legislative proposals to increase use of the Department's commercial
acquisition authorities based around the Section 809 Panel
recommendations and more recent ideas that would facilitate greater use
of commercial acquisition. Beyond this, and perhaps most critically,
DOD and Congress should work together with industry to address the
length of time it takes to execute a contract, and to bring a program
from prototype to Program of Record. The timeline it takes can be an
enormous barrier, particularly for small businesses with limited
capital.
Thirdly, Congress and DOD must recognize that the current
compliance, regulatory, and bureaucratic regimes--in most cases,
created with good intentions--often deter commercial or dual-use
companies, especially small businesses, from doing business with DOD.
Congress, working with industry, should examine existing policies; take
stock in what is working and what is not working; and remove
duplicative, overly onerous, and/or outdated policies that hinder
innovation, impede participation in the DIB and mire the Department in
red tape. Policies that should be examined and potentially amended or
repealed include: cost accounting standards; the business systems DFARS
clause; the DOD weighted profit guideline; data requirements for
commercial product for major weapons systems; the ``late is late''
rule; the only one offer policy; practices for peer reviews; and
requirements for external restructuring costs.
AIA looks forward to engaging with the committee more on these
recommendations and can provide additional detail. Clearing this
underbrush will make it easier for more businesses to participate more
robustly in the DIB, will allow both the DOD and the DIB to focus on
what really matters, and will streamline how the DIB does business with
its primary customer.
U.S. policymakers should also streamline the regulatory and
bureaucratic framework governing trade, foreign military sales (FMS),
and international security cooperation by implementing clear systems
and flexible policies that both incentivize and enhance cooperation
while building collective capacity with trusted partners. These systems
and policies should enable resiliency in our overall supply chains,
draw partners and allies closer together, and establish long-term
industrial and economic relationships that allow like-minded nations to
deter and respond to shared global threats. AIA has developed and
provided recommendations to DOD's FMS Tiger Team, which have also been
shared with Congress; in addition, AIA released recommendations
specific to the advanced capabilities pillar of the Australia-United
Kingdom-United States security pact known as AUKUS. We would welcome
further conversations with the committee on these recommendations and
will provide additional information as requested.
Finally, one of the strongest signals Congress can send is
providing on-time, stable, and sufficient funding through the annual
appropriations process--not by defaulting to continuing resolutions.
Providing clarity and certainty to both contractors and contracting
officials at DOD will allow programs to get started and operate
efficiently on the timelines they were intended. [See page 42.]
Mr. Norquist. At NDIA, our defense industrial readiness policy goal
is straightforward: to ensure our warfighters have the platforms,
services, and technologies they need so they never engage in a fair
fight against any competitor. We agree with your assessment that it is
necessary to find the right balance between incentivizing and investing
in innovative new technologies while also maintaining relevant and
effective current capabilities.
NDIA and our member companies applaud the significant work Congress
has already done to update authorities on the acquisition side.
However, there is a lack of alignment between acquisition authorities
and the requirements process that needs attention. This alignment will
better help the Congress visualize where it should balance risk in the
portfolio management between sustaining current capabilities, divesting
of current capabilities, and investing in updated capabilities.
This process should begin with the Department of Defense's (DOD)
wargames and models, which would assess both near term and future risk.
Assessing near term risk informs the need for maintaining current
systems, while assessing future risk illuminates where the military
services need to modernize. These wargames and models can then inform
budget requests and requirements, sending a clear demand signal to
industry. The DOD should not lower requirements due to assumptions of
what industry is capable of, and instead the Department should signal
to industry what is needed based on DOD's analysis. Given time, the
defense industrial base (DIB) is capable of increasing production to
meet the DOD and our warfighters' needs, but industry first needs a
clear and consistent demand signal. Congress can reinforce the
Department's demand signal by supporting multi-year contract
authorities, which have proven beneficial as DOD and industry work
together to maintain, and where appropriate, replenish, current
munitions stockpiles. This support would further strengthen the
Department's demand signal and provide sufficient predictability to
inform industry's long-term investments.
The DOD is currently working to update the Joint Operational
Concepts, which will inform new military service and combatant command
operating concepts as well as their requirements. While the new Joint
Operational Concepts are adjacent to industry concerns, clarity on the
requirements coming out of the new operating concepts will help
industry know how to utilize its internal research and development
(IRAD) dollars to adapt and respond to the needs of the military
services and combatant commands more quickly.
Recommendation: NDIA recommends Congress consider the following
areas in the FY2024 National Defense Authorization Act (NDAA):
Support the use of multi-year contracting authorities for
acquiring capabilities deemed critical by the Department's analysis.
Support industry and the DOD to get the balance right by
providing clear and consistent guidance on its expectations for how the
updated Joint Operational Concepts will inform and instill discipline
in the requirements process.
Direct more coordination between the requirements
community and acquisition community. [See page 42.]
Mr. Norquist. The U.S. defense industrial base (DIB) resiliency
required to sustain the U.S. in great power competition was sacrificed
as part of the 1990s peace dividend. The powerhouses of industrial
readiness--stable and predictable budgets; an experienced and
specialized workforces; diversified and modern infrastructure;
manufacturing innovation; and sufficient, including idle, capacity--
have all atrophied. Due to the illegal invasion of Ukraine, the
opportunity to address the current U.S. munitions inventory and its
budgeting and authorities deficiencies has never been timelier.
The military services' munitions requirements are derived from the
National Security Strategy (NSS) and the National Defense Strategy
(NDS). In the 1990s, the munitions requirements for the military
services were tied to operational plans for what would be required for
the U.S. to prevail in two major theater wars. Over time, the munitions
requirements have shifted with the strategies to what is required to
prevail in one major theater war while maintaining effective deterrence
in a second theater until resources can be shifted. In addition, over
the last twenty years, the U.S. has shifted from thinking about major
theater war operations to low-to-medium intensity conflicts, which has
de-prioritized certain categories of munitions such as artillery and
long-range fires.
In addition to the shifts in strategy and focus, munitions have
often been the bill payers for higher priorities in the Department of
Defense (DOD) budgeting process. While the military services and
combatant commands reference requirements-based processes, the
munitions requirements in the annual budget process are often softened
from ``what is required'' to ``what we can afford.'' As an example, to
save money, the military services have gotten into a habit of buying
production capacity to meet training requirements rather than major
theater of war requirements. In addition, there can be a tendency to
prioritize a wider breadth and shallower depth of capability rather
than completing the depth of any one capability. The assumption has
been that production can be accelerated in the event of conflict.
Recommendations: NDIA recommends the following oversight and
legislative lines of effort:
Oversight on Total Munitions Requirement. To effectively
evaluate ramp-up production, instead of focusing solely on the number
of years of production required, the military services should provide
the committees with the total inventory requirement for the operational
plans for different theaters. This will also better provide the
committee with visibility into how the transfer of munitions to Ukraine
are impacting the current and near-term readiness of the military
services.
Competition for Components. Ramping-up production of
munitions will exacerbate the competition for component parts, such as
electronics and circuit cards, with the civilian sector. Evaluating how
DOD is mapping those critical components and identifying industrial
policy mechanisms, including contracting mechanisms to ensure access to
these components, is a viable area of oversight.
Retention of Capability Authority. NDIA recommends
modifying 10 USC 2535, Defense Industrial Reserve, to include language
that defines retention of capability to produce munitions production
equipment for surge capability. The modification should also require
the military services to include provisions for surge capacity in
government contracts, which would require contractors to maintain the
ability to quickly ramp-up production. [See page 43.]
Mr. Paxton. For SCA and the U.S. shipyard industry, we work to
support efforts to build, maintain and modernize fleets for the Navy,
Coast Guard, MARAD and other government agencies, as well as the
nation's commercial markets. Industry responds to demand signals--
therefore ensuring a demand signal that may prove militarily useful
will help right-size industry incentives. Additionally, the government
customer benefits from a strong domestic market and in recent years
that has been challenged.
The domestic commercial market is sustained by the Jones Act, which
provides market certainty and stability. This law helps to ensure the
existence of a domestic shipbuilding and ship repair industrial base.
The Jones Act sustains a domestic market for which carriers, operators
and shipyards vigorously compete. Those shipyards cut their teeth on
increasingly complex vessels, especially for the offshore energy
markets, and that ultimately benefits the government customer and the
tax payer because those skills can be leveraged accordingly.
A 2017 decision by the Customs and Border Protection (CBP) has
allowed [certain] foreign-built, foreign-crewed and foreign-owned
offshore supply vessels to operate in violation of the Jones Act. This
has resulted in the cancelation of numerous construction contracts to
build new ``Made in the U.S.A.'' vessels because of the uncertainty
introduced by executive-fiat and in contravention of Congressional
intent. Not only does the cancellation of contracts have an immediate
dampening impact to the domestic industry, but it initiates a vicious
cycle wherein future opportunities could also be reconsidered or
rescinded. The cancellation of contracts also dampens the domestic
industry's ability to invest in their workforce and modernize their
facilities to make them more safe and efficient.
I raise this issue as an example of how a decision by an agency to
not enforce the Jones Act can have an adverse impact on commercial
shipbuilding that reverberates throughout the entire shipyard
industrial base, further raising costs and destabilizing its ability to
support national defense requirements. We encourage the Congress to
consider identifying and closing loopholes to the Jones Act that
currently exist by providing clarity on matters related to visa issues
and heavy lift operations that are integral to success and viability
this critical commercial market. [See page 42.]
Mr. Paxton. The SCA would be supportive of efforts to ensure there
are additional opportunities to grow the Jones Act fleet. Previously,
SCA has endorsed the Energizing American Shipbuilding Act (EASA) that
would require a certain amount of domestic energy cargoes be
transported on U.S. built ships for the international market. SCA
believes legislation like EASA would incentivize the construction of
militarily-useful vessels for auxiliary purposes. Additionally, SCA is
supportive of the Committee's FY23 authorization language that called
for the Maritime Administration, utilizing the model executed to
purchase 5 new National Security Multi-Mission Vessels (NSMV), to begin
the design concept of a Roll-On/Roll-Off Containership to replenish the
National Defense Reserve Fleet (NDRF) and is requesting funding to
support that effort in FY24. [See page 43.]
?
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING
February 8, 2023
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QUESTIONS SUBMITTED BY MR. WILSON
Mr. Wilson. China as the ``pacing threat,'' is undertaking an
unprecedented campaign of military modernization, underscored by
significant investment in its armed forces and national security
infrastructure through their own defense industrial base.
What hard problems do we need to solve to ensure that our Defense
Industrial Base maintains its competitive edge against China?
Mr. Fanning. The U.S. has an absolute advantage in its network of
partners and allies. Much like the multi-national government response
to Russia's invasion of Ukraine, the integration of close U.S. partners
into our industrial base and supply chains will be the key to ensure
our competitive edge in any future conflict.
We must be realistic about what China is investing in its military,
and also make strong investments of our own to meet the National
Defense Strategy and address inflation. The Pentagon said last year
that China's military budget ``nearly doubled'' from 2012 to 2021.
Beijing recently stated that this year alone China will increase its
defense budget by 7.2% (China's annual inflation rate is 1.0% percent
according to the National Bureau of Statistics of China). By
comparison, President Biden's proposed FY24 defense budget is a 3.2%
year-over-year increase (the United States' annual inflation rate is
6.4% according to the U.S. Bureau of Labor Statistics).
China's historic military modernization is being buffeted by
equally aggressive investments in innovation. Between 2000 and 2019,
China's share of global research and development (R&D) rose nearly 488
percent, from 4.9 percent to 23.9 percent. At the same time, China
extended its super deduction for R&D expenses for manufacturing
companies to an extra 100 percent of eligible R&D expenses in addition
to actual expenses incurred--while a recent U.S. tax change reduced
that deduction for American companies. That means for every $100 spent
on innovation, Chinese companies can deduct $200, 10 times more than
American companies in a similar situation.
The United States has clear opportunities to right the ship.
Federal investment in national defense must keep pace with the threats
we face. Next, Congress must restore competitive R&D tax amortization
rules to strengthen our global R&D posture relative to China and other
nations. Lastly, on the international stage, governments are working
closely, but our democratic industrial bases need the equivalent policy
and regulatory runway to excel so that overall integrated deterrence is
achieved. To this end, it is important the U.S. ease regulatory burdens
that inhibit closer cooperation with allies and trusted partners.
Easing technology transfer requirements and promoting the seamless
integration of U.S. and allied industrial bases are key to out
innovating and deterring our adversaries.
Mr. Wilson. Supporting allies and partners through Foreign Military
Sales is a function only secured via the DOD acquisitions system, which
a standard contract takes on average nearly 18 months to award. As
tensions with China grow, the war in Ukraine continues, and support to
other allies and partners remain; what can the DOD do to improve the
overall Foreign Military Sales process to deliver the best capability
to partners on an accelerated timeline especially for those in a
current conflict?
Mr. Fanning. The U.S. needs a modernized, strategic Foreign
Military Sales (FMS) system capable of addressing the current and
future threat environment--one built to deliver critical capabilities
to international partners as quickly and concurrently as the U.S. armed
forces. The DOD must act with a sense of urgency and fully commit
itself to using FMS as a primary foreign policy tool to support U.S.
interests, warfighters, and partners and allies. FMS must be integrated
into the larger warfighting construct of the Combatant Commanders and
the acquisition requirements of the military departments. This
commitment to FMS must come from the highest levels in OSD and include
the service secretaries and the supporting military department
bureaucracy that is largely responsible for executing the process.
Mr. Wilson. China as the ``pacing threat,'' is undertaking an
unprecedented campaign of military modernization, underscored by
significant investment in its armed forces and national security
infrastructure through their own defense industrial base.
What hard problems do we need to solve to ensure that our Defense
Industrial Base maintains its competitive edge against China?
Mr. Norquist. The 2022 National Security Strategy (NSS) states that
``the post-Cold War era is definitely over and a competition is
underway between the major powers to shape what comes next.'' In this
context, the U.S., along with its Allies and partners, must be prepared
to prevail in the return of great power competition.
Unfortunately, as NDIA's Vital Signs 2023 notes, the U.S. defense
industrial base (DIB) resiliency required to sustain the U.S. in great
power conflict was sacrificed as part of the 1990s peace dividend. The
powerhouses of industrial readiness--stable and predictable budgets; an
experienced and specialized workforce; diversified and modern
infrastructure; manufacturing innovation; and sufficient, including
idle, capacity--have all atrophied under the combined transition to a
services-based economy with a premium on just-in-time commercial supply
chains.
NDIA member companies are emphasizing that the federal acquisition
process is growing more--not less--cumbersome; the lack of budget
stability is breaking companies and causing significant workforce
uncertainty; and the challenges of finding and retaining talent are
impacting even our most strategic defense programs. The current
inflation level is as a cross-cutting issue impacting both the
acquisition process and workforce management. The federal government
must prioritize removing policies, regulations, and authorities that
are strangling the DIB and make significant, sustained, and predictable
financial investments to rebuild the DIB's strategic endurance and
resilience.
A high-end fight with a peer adversary will require the U.S. to
have both technological competitive advantages and significantly
expanded industrial capacity. Therefore, to support the U.S. DIB, NDIA
recommends Congress solve the following issue areas:
1. Provide timely, consistent, and sufficient budgets.
2. Increase surge production capacity.
3. Increase incentives for research and development funding.
4. Increase the incentives for small, medium, and non-traditional
companies to participate in the defense industrial base.
1. Provide Timely, Consistent, and Sufficient Budgets.
From 1985 to 2021, national defense spending dropped from 5.8% to
3.2% of U.S. GDP, and the Congressional Budget Office projects a
further decline of 2.7% by 2032. In addition, in 13 of the last 14
years, the federal government has operated under a continuing
resolution (CR) for part of the year, preventing new starts essential
for modernization and delaying increased production rates, multi-year
procurement authorities, and advanced procurement funding essential for
building capacity. The U.S. must change its defense resourcing strategy
to support an industrial footprint required to prevail in great power
competition.
Recommendation: NDIA strongly endorses on-time passage of the
FY2024 National Defense Authorization Act (NDAA) and FY2024 Defense
Appropriations, with a topline budget for the Department of Defense
(DOD) of 3-4 percent real growth to meet the requirements identified in
the National Defense Strategy (NDS) and to address the ongoing impact
of inflation.
2. Increase Surge Production Capacity.
Russia's illegal invasion of Ukraine highlighted the brittle
posture of the U.S. DIB, especially its atrophied surge capacity and
the ability to ramp-up production.
Recommendation: NDIA recommends modifying 10 USC 2535, Defense
Industrial Reserve, to include language that defines retention of
capability to produce munitions production equipment for surge
capability. This change should also require the military services to
include provisions for surge capacity in government contracts, which
would require contractors to maintain the ability to quickly ramp-up
production. These provisions would help ensure that the U.S. DIB can
rapidly respond to emerging threats and maintain a competitive edge
against China.
3. Increase Incentives for Research and Development Funding.
To maintain its technological competitive advantage, the U.S. must
prioritize continued and increased investment in research and
development (R&D). Congress can play a critical role in this area by
providing sustained funding for R&D, incentivizing private sector
investment, and supporting public-private partnerships to support
emerging technologies.
Recommendation: Congress should end the five-year R&D tax
amortization introduced in the Tax Cuts and Jobs Act of 2017 (TCJA),
which went into effect in January 2022. This provision ended the 70-
year tax code permitting companies to write-off qualifying R&D
expenditures annually. The TCJA R&D tax amortization means that
companies investing in R&D are only allowed to make deductions on 20%
of qualifying R&D expenses per year. This amortization severely
undermines U.S. defense companies' ability to fund vital R&D projects.
Conversely, the People's Republic of China (PRC) utilizes a super
deduction of qualifying R&D expenses for companies.
4. Increase the incentives for small, medium, and non-traditional
companies to participate in the defense industrial base.
In the last five years, the defense ecosystem has lost 17,045
companies, and DOD estimates the number of small businesses
participating in the DIB has declined by over 40% in the last decade.
These net numbers also hide other vulnerabilities to the readiness and
reconstitution of industry. For example, one key issue is the over-
reliance of sole source suppliers, including from foreign sources.
Therefore, Congress should focus on measures that streamline
acquisition and reduce regulatory barriers for small businesses and
non-traditional defense companies.
Recommendation: NDIA recommends that Congress support legislation
to:
Streamline acquisition to shorten timelines from program
initiation to contract award.
Authorize and appropriate funding for the DOD's Rapid
Innovation Fund, which is meant to help small businesses bridge the
``Valley of Death'' but has not been funded since 2019.
Build upon previous improvements to the process of
adjudicating personnel security clearances to expand and improve
reciprocity for personnel clearances and to streamline the process for
facility clearance processes to support small companies and emerging
technology companies.
Mr. Wilson. China as the ``pacing threat,'' is undertaking an
unprecedented campaign of military modernization, underscored by
significant investment in its armed forces and national security
infrastructure through their own defense industrial base.
What hard problems do we need to solve to ensure that our Defense
Industrial Base maintains its competitive edge against China?
Mr. Paxton. To grow and develop the next generation of shipyard
workers, U.S. shipyards require market stability across sectors so that
companies can make the required investment in their people and
facilities to meet demand to counter any near-peer competition.
SCA would encourage the Congress to continue to support stable,
realistic and predictable budgets for the U.S. Navy and Coast Guard and
we appreciate the work this committee has done to add authorities and
dollars to critical accounts to see these goals realized. While we
recognize it is hard to accurately forecast needs 30 years into the
future, there must at least be stability and fidelity in the FYDP and
the 10-year horizon otherwise there will be significant disruption to
the industrial base. Additionally, we encourage this committee and the
Congress to continue to hold the services to account through effective
oversight.
Mr. Wilson. Your written statement for this hearing describes that
the United States Navy has provided mixed messages over the last five
years on the policy directed from the FY 2018 NDAA that the United
States Navy will maintain a force of 355 ships.
What specificity and clarity does the Shipbuilders Council of
America need from the United States Navy to ensure that the industry
can accomplish the 355-ship objective?
Mr. Paxton. There needs to be fidelity in the plans being put
forward from the Navy. When programs are truncated or pushed to the
right, that introduces volatility to the industrial base. Additionally,
retiring ships early results in boom-and-bust cycle on the ship repair
side that can make it extremely difficult to retain the critical
workforce needed.
In addition to providing the required products required to build
and maintain our ships, shipyards and suppliers alike must also meet
certain onerous accounting and cybersecurity requirements to be a part
of our industrial base. Industry understands why those rules exist and
are not resisting them. However, when programs get truncated or pushed
further out, the capital expenditures required to maintain status in
the defense industrial base is significant and can inhibit companies
from making the required investments in potential future programs.
The Navy needs to understand the strain that this volatility has on
the industrial base and how it impacts how businesses make decisions.
Recent charts from CBO best demonstrate this volatility (see below).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
QUESTIONS SUBMITTED BY MR. GALLAGHER
Mr. Gallagher. What changes to ITAR, the DPA, or other DOD
authorities would build resiliency in our own munitions and critical
defense stockpiles with the industrial might of allies in AUKUS, Five
Eyes, and others, particularly in the Indo-Pacific region where cutting
down resupply time would be critical? And how might this help lines
stay open?
Mr. Fanning. Our industry continues to be supportive of
incorporating allies and partners in our supply chains and applauds
Congress' recent addition of New Zealand to the National Technology and
Industrial Base (NTIB). The NTIB is a reflection that the U.S. defense
and industrial base is a global one and that the U.S. must integrate
both international and domestic sourcing to maintain our competitive
edge. Therefore, recognizing Australia, the UK, Canada, and New Zealand
as members of the defense industrial base cannot be a symbolic gesture,
Congress must provide the regulatory framework and resources to
incentivize deeper integration of our industrial base with NTIB
partners and bolster capacity where the U.S. is experiencing gaps.
Investment in research and defense in NTIB nations, implementing modern
technology transfer and acquisition regulations and policies, and
examining how we may integrate NTIB countries into the DPA are integral
to operationalizing the NTIB and other security pacts agreements such
as AUKUS.
Mr. Gallagher. What changes to ITAR, the DPA, or other DOD
authorities would build resiliency in our own munitions and critical
defense stockpiles with the industrial might of allies in AUKUS, Five
Eyes, and others, particularly in the Indo-Pacific region where cutting
down resupply time would be critical? And how might this help lines
stay open?
Mr. Norquist. In the return of great power competition, the United
States has two strategic advantages: our unparalleled network of Allies
and partners and our innovative defense industrial base (DIB). NDIA and
our member companies strongly support changes to International Traffic
in Arms Regulations (ITAR), the Defense Production Act (DPA), and other
Department of Defense (DOD) authorities that would build
interoperability with our Allies and partners and re-build resiliency
in U.S. munitions stockpiles.
NDIA recommends changes to ITAR to facilitate greater sharing of
defense-related technology and information between the U.S. and our
Allies. Currently, the U.S. defense export regulations process treats
our closest Allies in the same way as newly emerging Allies. Overly
burdensome U.S. regulations are disincentivizing our Allies doing
business with U.S. defense companies. The recommended changes to ITAR
are to make it easier for U.S. suppliers, especially small companies
and middle-tier suppliers, to sell their parts and components to our
most trusted Allies.
These recommendations include:
Streamlining the export licensing process for certain
technologies.
Creating a more flexible framework for technology
transfer to trusted partners.
Additionally, to meet the policy goal of increasing
interoperability, any changes to ITAR need to enable our most trusted
Allies and partners to approve the export of their own capabilities
that utilize U.S. products and parts to other Allied countries.
NDIA recommends changes to DPA to enable the U.S. to invest in
critical defense infrastructure and technology in partner countries,
particularly in the Indo-Pacific region. This includes investing in
joint manufacturing facilities for critical defense components and
stockpiles, as well as investing in research and development (R&D) to
identify new and innovative solutions to shared defense challenges.
Using DPA in this way would support Pillar II of the AUKUS agreement,
which focuses on furthering trilateral technological development across
advanced capabilities to promote security and stability in the Indo-
Pacific.
Finally, NDIA recommends leveraging existing DOD authorities, such
as the Foreign Military Sales (FMS) program, to facilitate greater
collaboration and interoperability in critical defense infrastructure
among our Allies. NDIA and our member companies are encouraged by the
work being done by the DOD's FMS Tiger Team in evaluating the current
FMS process, and we applaud Congress' cross-committee interest in
modernizing the FMS system so that it is strategic, flexible, and able
to quickly deliver critical capabilities to our Allies and partners. We
especially appreciate the emphasis both the Department and Congress
have put on involving industry in the FMS modernization process.
To build upon the progress already made on FMS modernization, NDIA
recommends that Congress--rather than introduce new authorities--focus
instead on the following issues:
Collaborate with industry to provide oversight of the FMS
Tiger Team's 85 recommendations in order to prioritize the most
important proposals.
Prioritize our closest Allies and partners when they
submit an FMS application rather than processing applications as they
are received.
Invest in an increased and expertly trained FMS
contracting workforce.
Implement a start-to-finish tracking system for FMS
contracts to support our allies and partners throughout the Letter of
Request (LOR), Letter of Offer and Acceptance (LOA), and acquisition
process.
NDIA and our sister associations, the Aerospace Industrial
Association (AIA) and the Professional Services Council (PSC), have
compiled feedback on the FMS process from member companies, and we
would welcome the opportunity to present this information to the House
Armed Services Committee at a time that is convenient for you.
Additionally, NDIA is willing to convene a roundtable discussion where
subject matter experts (SMEs) could share their perspective on the
overall U.S. export control regulations environment with Congress.
Overall, these changes could help build resiliency in our own
munitions and critical defense stockpiles by leveraging the industrial
might of our Allies, helping to ensure that our stockpiles are more
resilient and that supply lines remain open, even in times of crisis.
By facilitating greater collaboration and investment in shared defense
infrastructure and technology, we can help ensure that we are better
prepared to address emerging threats and maintain a competitive edge
over our adversaries.
Mr. Gallagher. Mr. Norquist, the NDIA Vital Signs survey stated,
``The federal acquisition process is growing more, not less,
cumbersome.'' Would normalizing and expanding the use of Other
Transaction Authorities stimulate innovation and deliver to the hands
of the warfighter more rapidly by allowing for more flexible defense
acquisitions pathways?
Mr. Norquist. Yes. In Vital Signs 2023, 30% of the participating
NDIA member companies cited the burden of the acquisition process and
paperwork as the most pressing issue facing the U.S. defense industrial
base (DIB).
NDIA strongly endorses expanding the use of Other Transaction
Authorities (OTAs) as part of the solution of addressing this
challenge. The power of OTAs is their flexibility. Normalizing or
expanding the use of OTAs should be encouraged, as well as training the
acquisition workforce to properly use OTAs to maximize opportunity to
streamline acquisition without the insertion of traditional contract
clauses. NDIA supported Section 824 of the Fiscal Year 2022 National
Defense Authorization Act (NDAA), which directed the Department of
Defense (DOD) to consider a number of opportunities to expand the use
of OTAs, and our member companies were encouraged by DOD's assessment
that it did not see anything in 10 USC 4022 that would prohibit the
expanded use of OTAs.
10 USC 4022 provides authority to DOD to use OTAs if one of the
following is met:
1) There is at least one non-traditional defense contractor.
2) There is significant participation by small businesses or non-
traditional defense contractors (NDC).
3) At least one third of the total cost is not funded by the
federal government.
4) The senior procurement executive provides a waiver.
Aside from these requirements, OTAs are free of other statutory or
regulatory burdens. This allows for greater collaboration between
industry, academia, and government during the acquisition cycle.
Importantly, the U.S. government can collaborate with industry on
requirements as well as potential solutions. In addition, industry is
compelled by the requirements of 10 USC 4022 to collaborate with each
other.
NDIA notes two areas which require congressional support to keep
the spirit of current and expanded use of OTAs intact:
1) As OTAs are used more often, Congress should avoid requiring
the inclusion of certain contract clauses that would undermine the
value of OTAs' flexibility and open the door to overregulation.
2) NDIA member companies have raised concerns that the DOD
acquisition workforce often reverts to the more familiar, and perceived
safer, contract clauses from traditional FAR and DFARs-based contracts.
This significantly undermines the value of OTAs, as their power lies in
their flexibility. While the use of OTAs is not appropriate for all
situations, as the appropriate use of OTAs expands, it is important the
authority is used correctly.
Recommendation: NDIA strongly endorses action in the FY2024
National Defense Authorization Act (NDAA) to address the role of the
acquisition workforce with respect to OTAs. Specifically:
Authorize funding to train the acquisition workforce on
responsible but creative ways to exercise their OTA authorities
appropriately and effectively. This training should especially
discourage the acquisition workforce from reinserting traditional
contract clauses onto OTA contracts when they are not necessary.
Mr. Gallagher. What changes to ITAR, the DPA, or other DOD
authorities would build resiliency in our own munitions and critical
defense stockpiles with the industrial might of allies in AUKUS, Five
Eyes, and others, particularly in the Indo-Pacific region where cutting
down resupply time would be critical? And how might this help lines
stay open?
Mr. Paxton. At present, SCA does not have positions on proposed
changes to DOD authorities to address this particular issue. However,
we know that alternative funding strategies, including advanced
procurement, block buys and multi-year funding can help make the
requisite investments to ensure that there are sufficient orders of
parts and supplies to ensure on time delivery of Navy assets.
Mr. Gallagher. How would the Armed Services utilizing block buys
for systems like Army Watercraft and potential light amphibs or LSMs
(Medium Landing Ship) result in cost-savings and expeditiously
delivered capabilities to the services/Pacific? And can you touch on
the damage to industry and delivery when the services continue to pile
on and alter requirements to ship designs--and what can be done about
this in your view?
Mr. Paxton. While SCA does not advocate for one program over
another, we can speak to the benefits we know exist when acquisition
strategies that enhance cost reduction are used in ship procurement.
Authorizing alternative funding approaches such as advanced
procurement, incremental funding and block buy contracting could
increase stability in Navy and Coast Guard shipbuilding plans and
increase the number of ships that could be built for the same amount of
procurement funding.
Through the use of advanced procurement in shipbuilding, Congress
can define the full cost of a ship in an initial appropriations act but
defer some of the appropriation to future years. For the shipbuilding
industry and the supplier base, this creates an early financial
commitment that enhances job security and encourages capital
investment. Additionally, advance procurement can reduce the total
construction cost of a ship through improved sequencing or year-to-year
balancing of shipyard construction work and the purchase of batch items
that can be manufactured in an efficient and economic manner.
Authorization of incremental funding, where cost is divided into
two or more annual portions, allows for expensive items, such as large
Navy ships, to be procured in a given year while avoiding or mitigating
budget ``spikes'' and major fluctuations in year-to-year budget totals.
While this authorization also requires appropriations support, industry
believes that incremental funding would also allow construction to
start on a larger number of ships in a given year so as to achieve
better production economies. And an added benefit often not considered
is a reduction in the amount of unobligated balances associated with
DOD procurement programs.
Industry appreciates the block buys authorized in the FY23 NDAA.
Block buy contracting permits the Department of Defense to use a single
contract for more than one year's worth of procurement of a given kind
of ship without having to exercise contract options for each year after
the first year. Purchasing ships through block buy contracting enables
shipyards to leverage ``hot'' production lines--those assembling
current ships--and streamline the acquisition process for these
vessels.
______
QUESTIONS SUBMITTED BY MR. BERGMAN
Mr. Bergman. Are we noticing a decline in small businesses that is
impacting a specific industry harder than another? Are we losing more
small businesses in aerospace vs. shipyards? And if so, what policies
can Congress implement to incentivize reversing that trend?
Mr. Fanning. We are seeing an industry-wide decline in small
business participation in the defense industrial base (DIB), as noted
in a GAO report that found over the past decade small business in the
DIB shrunk over 40 percent. The data shows that if we continue along
the same trend, we could lose an additional 15,000 suppliers over the
next 10 years. Companies seeking to enter the DIB must contend with a
multitude of laws and regulations that are cost- and time-prohibitive,
disrupt established supply chains, and require implementation of new
systems, processes, and procedures. For example, additional compliance
requirements, such as Cybersecurity Maturity Model Certification
(CMMC), will further stress an already vulnerable supply chain, and
more companies will exit the DIB due to the real costs associated.
Congress and the DOD must do more to lower the costs of compliance and
offer assistance to small businesses that are critical to the DIB.
Mr. Bergman. Supply chains for major defense programs have millions
of components from thousands of suppliers. What degree of visibility
into defense supply chains is possible? How can Congress help the DOD
and the defense industry work together to mitigate supply chain risks
it cannot see?
Mr. Fanning. There are two ways to approach the defense industrial
base's (DIB) supply chain visibility: large-scale studies and analyses
that view the DIB as a whole; and routine, ongoing observation that
identifies or predicts specific problems in real time. There has been
no shortage of routine reporting and macro-level studies of the DIB
over the past 20 years; scores or even hundreds by some estimates.
Major efforts include the Defense Industrial Base Capabilities Study
(DIBCS), a periodic study that began in 2004; the Sector-by-Sector,
Tier-by-Tier (S2T2) study of 2012-2014; and the major analyses and
reports generated by both the Trump (E.O. 13806) and Biden (E.O. 14017)
Administrations. Congress requires an annual Industrial Capabilities
Report, produced by DOD Industrial Policy, in the Office of the
Undersecretary of Defense for Acquisition and Sustainment (USD A&S);
those reports in turn list all other supply chain reports done each
year, by DCMA, the armed services, and others. At this point, there is
little that is not known about what has happened, or can happen, when
supply chains are weak or disrupted, and much has been learned from the
experiences of the pandemic response and surge in demand relate to
Ukraine; the challenge now is to identify effective tools and remedies.
At the operational level, the DIB's supply chains have many links,
and their transactions are often obscured by privity of contract
between supplier and buyer. However, the private sector has responded
to recent supply chain turbulence by developing processes and tools
that better illuminate the supply chain. These processes and tools
provide a view of the supplier's financial posture, foundational and
specialty manufacturing processes, and the provenance of the piece
parts, subassemblies, and materials used in these processes. AIA has
received demonstrations of tools that provide this data. Especially if
supported by artificial intelligence (AI), these elements can be melded
with other available market, program, and product information to better
identify, anticipate and mitigate risks.
Our industry is actively coordinating with the U.S. government on
its efforts to build more resilient and secure supply chains and engage
in supply chain illumination. Successive administrations, including the
Biden Administration, as well as Congress, have stressed the importance
of a building more resiliency in U.S. supply chains, have already
implemented regulatory regimes that promote strategic supply chain
diversification, and encouraged U.S. industry to source from our
closest allies and partners. Congress and DOD can further work together
to mitigate unseen risk by building cushion, or margin, into supply
chains. Congress and the Department of Defense (DOD) can and should
provide incentives to source domestically, produce/refine and assemble
domestically, carry inventory to be used in the event of supply chain
disruption or interdiction, and ensure second or more sources of supply
are available along with excess production capacity to facilitate
production ramp-up or delivery acceleration orders. Additionally, DOD
could buy raw materials in bulk and provide these materials `at cost'
to eliminate competition among suppliers for foreign source material
that drives up costs and can leave some suppliers without materials.
Congress can incentivize raw material producers (the miners of the raw
ores that will ultimately be refined into pliable materials). Finally,
Congress can incentivize companies that develop alternative products
and processes that meet (or exceed) the requirements of the scarce raw
material resources.
Internationally, we can and must also look to our allies and
partners and work with them as we collectively face supply chain
challenges. Notably, critical materials supply chain mitigation is an
area where allies and partners can play a key role, both as a provider
of critical materials as well as a source of refining for eventual
import into the United States. Both the Congress and the Administration
have identified partners and allies as critical to our supply chain
security and we must carefully balance leveraging those partners and
allies against the domestic sourcing provisions found in various
congressional authorities or those defined under Executive Order 14017.
Mr. Bergman. Are we noticing a decline in small businesses that is
impacting a specific industry harder than another? Are we losing more
small businesses in aerospace vs. shipyards? And if so, what policies
can Congress implement to incentivize reversing that trend?
Mr. Norquist. Small businesses in the U.S. defense industrial base
(DIB) are the foundation of NDIA's membership, and we are honored to
ensure their voice and perspective is front and center of all our
educational engagements with Congress and the Department of Defense
(DOD).
NDIA's Vital Signs 2023 highlights that ``in the last five years,
the defense ecosystem has lost a net 17,045 companies and the
Department of Defense estimates the number of small businesses
participating in the defense industrial base has declined by over 40%
in the last decade.'' Furthermore, the NDIA Small Business Division
reports it is noticing a trend of high-technology innovators exiting
the U.S. DIB and a struggle to encourage new entrants as well.
Additionally, throughout COVID, small businesses in the aerospace
industry struggled as their opportunities for both defense and
commercial contracts atrophied. Companies of all sizes across the
aerospace industry struggled; however, small aerospace companies faced
more immediate and drastic consequences. Like small businesses across
the country in every sector, small businesses in the aerospace industry
did not have the financial reserves to sustain themselves throughout a
protracted shutdown of industry.
Small businesses in the shipyard industry faced similar issues, but
shipyards did not face a total loss of the commercial sector the way
that the aerospace industry did. Additionally, small businesses in the
shipyard industry have benefited from a focused set of legislative and
policy-related programs to specifically develop its workforce. NDIA and
our member companies fully support this approach and thank Congress for
the ongoing focus in this area.
At the same time, it is important to recognize that while COVID
severely impacted these sectors, COVID is not the root cause of
consolidation within the DIB. In 2021, the Government Accountability
Office (GAO) reported that from 2011 to 2020 the number of DOD
contracts awarded to small businesses decreased by 43%. This is an
issue that long pre-dates COVID.
The cause of shrinkage is the DOD business model. Currently, the
DOD does not actively work to retain companies in the DIB. In fact, it
often does the opposite for small businesses and non-traditional
defense companies (NDCs). Small businesses and NDCs often experience
the frustration of delivering innovative solutions to the DOD, only to
find that in the next contracting cycle the Department has chosen to
bring that function or technology development effort ``in house.''
Despite the Department's acknowledgement that retention is a major
issue facing the DIB, this business model actively pushes companies out
of the DIB and weakens the resilience of the industrial base.
Recommendation:
Congress should require the Department to provide it with
justification when choosing a government entity to deliver a
capability, rather than an industry partner that is capable of
delivering it, especially if the private sector provided it in the
past.
In addition, one of the challenges associated with disruptive
innovation is that is inherently disruptive by nature. The introduction
of new technologies or approaches often changes the status quo and
requires overcoming inertia to implement. Furthermore, it can alter the
value proposition for established business relationships, necessitating
incentives to encourage long-term behavioral changes.
Recommendations:
Congress should develop both financial and career
incentives for government program managers and contracting officers who
prioritize small business contracts when appropriate, with strong top-
down leadership and smooth execution being crucial for successful
implementation.
Congress should standardize and improve training for the
acquisition workforce on small business programs, policies, and
initiatives so that these individuals can look for opportunities for
small businesses set-aside and multiple award contracts from the early
stages of the acquisition process.
Finally, the core of the discussion of reducing barriers to entry
and retaining small businesses already working within the DIB needs to
focus on innovation and rewarding the small businesses which bring
innovation to the DIB. NDIA and our member companies are encouraged by
the work currently being done by DOD's Office of Small Business
Programs (OSBP) on this issue. NDIA would recommend that Congress
enthusiastically support these efforts, especially the push to make the
Small Business Innovation Research (SBIR) and Small Business Technology
Transfer (SBTT) programs permanent. SBIR and STTR are invaluable
programs that encourage small businesses to engage in federal R&D with
the potential for commercialization. It is estimated that in fiscal
year 2020, the SBIR and STTR programs resulted in nearly $3.9 billion
in funding for small high-technology businesses, and these programs
have been consistently instrumental in bringing innovative capabilities
and solutions to the DOD. However, last year SBIR and STTR almost
expired. The loss of these programs would be detrimental to the DIB and
U.S. national security.
Recommendation:
Congress should make both the SBIR and STTR programs
permanent in the FY2024 National Defense Authorization Act (NDAA).
Mr. Bergman. Supply chains for major defense programs have millions
of components from thousands of suppliers. What degree of visibility
into defense supply chains is possible? How can Congress help the DOD
and the defense industry work together to mitigate supply chain risks
it cannot see?
Mr. Norquist. NDIA member companies share the same objective as the
Department of Defense (DOD): to ensure resilient and secure supply
chains of critical components and parts. There is a mutual desire to
mitigate business and operational risks. Ideally, policy discussions in
this area will remain an open dialogue between the commercial sector
and the government. To avoid unintended consequences, Congress should
resist pressure to enact top-down mandates and instead insist upon
increased collaboration between DOD, industry, and other agencies.
Proactive commercial companies are already achieving significant
visibility into their supply chains. They deem this visibility
necessary for their own unique risk management purposes, and they often
have four or more tiers of visibility for critical parts. Currently,
their visibility is primarily focused on assuring access and
availability of parts. The processes for illuminating the trust and
assurance of suppliers, as well as product integrity, are not yet as
mature.
However, DOD has unique challenges to consider beyond the current
efforts of commercial companies. While commercial companies generally
use a single enterprise resource planning (ERP) system, DOD's level of
control is limited, as portfolio asset and demand data are dispersed
across many different systems and owners. To address this challenge,
the DOD should run a risk assessment and prioritize what parts,
services, and capabilities need to be tracked throughout the supply
chain. This would ensure that the DOD finds balance between security
and cost when mitigating supply chain risks.
Additionally, the U.S. government's goal of ensuring national and
economic security supply chain assurance is much wider than the goal of
any single company. Therefore, the government needs additional unique
illumination capabilities to aggregate cross-industry parts and
materials criticality information. Over the past several years,
customized DOD supply chain risk management (SCRM) tools have been
evolving quickly, but there is still significant development work that
needs to occur regarding their accuracy before the government should
make a final decision regarding these customized tools.
For more perspectives on the gap between commercial state-of-the-
art practice and the U.S. government and DOD's current capabilities,
NDIA recommends consulting with government employees who have
implemented, or are currently implementing, supply chain visibility
solutions, such as those involved with the Food and Drug Administration
(FDA), the Navy's Electronics Authority, and DOD's Exiger and Interos
implementations. For example, DOD must be able to employ many different
approaches to gather supply chain risk information, beyond commercially
available SCRM software solutions, such as requests for bill of
materials (BOM) information and SCRM DFAR flow-downs.
At the same time, because most of the DOD supply chain is comprised
of commercial suppliers who sell dual-use products to both government
and other industries, Congress can help DOD now by helping the
Department to take advantage of commercial best practices.
NDIA recommends that Congress support legislation that:
Requires DOD to complete a comprehensive risk assessment
to prioritize what parts, services, and capabilities need to be tracked
throughout the supply chain in an effort to balance cost and supply
chain resilience.
Requires DOD and other agencies evaluate commercially
available SCRM tools and marketplaces before deciding to invest in
internally developing SCRM capabilities.
Requires DOD and other agencies evaluate readily
available commercial-off-the-shelf (COTS) parts and solutions before
deciding to invest in customized solutions.
Requires programs to implement measurable SCRM strategies
during acquisition processes and encourages standardized SCRM
terminology and practices across agencies.
Helps DOD set up supplier agreements for SCRM
information-sharing and SCRM services that address suppliers' concerns,
including adding hold-harmless clauses for information-sharing and
protecting their intellectual property. Furthermore, DOD should refrain
from cutting them out by going around their suppliers.
Additionally, Congress can help by enabling DOD to invest in new
courses of action (COAs) to address foreseeable types of risks, such as
a ``rip-and-replace'' fund to remedy newly discovered risks like Huawei
product, and long-term sustainment service programs, just like
commercial companies, to avoid microelectronics obsolescence.
Mr. Bergman. Are we noticing a decline in small businesses that is
impacting a specific industry harder than another? Are we losing more
small businesses in aerospace vs. shipyards? And if so, what policies
can Congress implement to incentivize reversing that trend?
Mr. Paxton. This question would be better directed to the other co-
panelists who can better speak to the overall impact on small
businesses across the defense industrial base.
Mr. Bergman. Supply chains for major defense programs have millions
of components from thousands of suppliers. What degree of visibility
into defense supply chains is possible? How can Congress help the DOD
and the defense industry work together to mitigate supply chain risks
it cannot see?
Mr. Paxton. SCA does not have a stated position on this issue.
However, we know that this is an extremely complex challenge and is
rightfully concerning to the Congress. We believe this issue will be
best worked through in partnership with our government customers to
strike the right balance between delivering advanced, quality products
and mitigating risk.
______
QUESTION SUBMITTED BY MR. JOHNSON
Mr. Johnson. Can you tell me about the impact inflation is having
on your shipyards, especially the smaller ones?
Mr. Paxton. Unprecedented and systemic supply chain and other
economic disruptions, including record levels of inflation, are
contributing to extremely challenging circumstances for the shipyard
industrial base.
Many contracts in the shipyard industrial base were negotiated with
expectations of only 2 to 3 percent inflation and with properly
functioning global and domestic supply chains. Inflation is still
elevated at 6.5% and with lingering issues in the supply chain,
companies are now faced with possible schedule delays, less output, and
cost increases. Those who have entered into firm-fixed-price contracts
(FFPs) are even more susceptible to the changing dynamics of today's
economic environment. Unfortunately, in most cases, the services have
expected the private shipyard industry to absorb the delta in costs.
Because FFP contracts are more vulnerable to inflation-driven price
increases, firms with fewer resources will bear the brunt of inflation
as they work to deliver on government contracts.
______
QUESTION SUBMITTED BY MR. HORSFORD
Mr. Horsford. Last year Mr. Norquist and NDIA appeared before the
House Manufacturing Caucus to underscore the importance of U.S. CNC
manufacturing and other essential manufacturers to our national
security and military readiness. I will be interested in
recommendations from today's hearing and how we can work with the
Department to consider greater use of Defense Production Act Title I
and Title III authorities to prioritize the supply chain needs of the
U.S. CNC manufacturing base and other vital defense industrial base
sectors facing increased competitive threats from China and continued
supply chain challenges.
Mr. Norquist. The use of Defense Production Act (DPA) Title I and
Title III authorities can play an important role in supporting the U.S.
computerized numerical control (CNC) manufacturing base and other vital
defense industrial sectors facing increased competitive threats from
China and continued supply chain challenges. These authorities allow
the Department of Defense (DOD) to prioritize and invest in critical
capabilities and technologies, as well as provide financial incentives
to companies that are vital to our national security. NDIA is
encouraged by the work that Congress and DOD have already done to
increase the breadth and scope of the DPA authorities, and our member
companies believe that they can be used to address both capabilities
and capacity, starting with looking for ways to address risky parts
that affect national and economic security.
At the core of this issue is the fact that everyone, both
commercial companies and the DOD, is competing for the same
manufacturing tools, and there are only a few companies who make these
machines. It's not uncommon to see six-month lead-times on major CNC
machines, even in an environment where there are no surge requirements.
In addition, while CNC is often the most referenced example, there are
many other manufacturing tools and capabilities that are also critical
to national and economic security in which there are similar issues,
such as printed circuit boards.
The first challenge that needs to be addressed is to map the
criticality of different machine types and to identify where the
defense industry should take exception to current just-in-time
practices and to invest in resilience. For more perspectives on
addressing the domestic machine tool reediness gap, NDIA recommends
that Congress consult with the DOD's Industrial Base Analysis and
Sustainment (IBAS) machine tools program, which focuses on surge
capacity requirements. Congress should work with the DOD to identify
these critical capabilities and technologies that are essential to our
national security and prioritize investments in these areas through DPA
Title III authorities.
Additionally, to help prioritize the supply chain needs of the U.S.
CNC manufacturing base and other vital defense industrial sectors,
Congress can work with the DOD to ensure that DPA Title I and Title III
authorities are fully utilized. This could include streamlining the DPA
application process, increasing funding for DPA programs, and expanding
the range of eligible companies and technologies.
In conclusion, DPA Title I and Title III authorities can play a
crucial role in supporting the U.S. CNC manufacturing base and other
vital defense sectors facing increased competitive threats from China
and continued supply chain challenges. By working together to
prioritize and invest in critical capabilities and technologies,
Congress, the DOD, and industry can help ensure that the DIB remains
competitive, resilient, and capable of meeting the evolving threats to
our national security. This will require increased cooperation between
and among government and industry, and NDIA welcomes the opportunity to
facilitate collaboration moving forward.