1999 Fletcher - Day 2 Luncheon Address

1999 Fletcher Conference

Tuesday, November 2, 1999 12:15 to 1:45 p.m.
Day Two Luncheon Address:

Setting Defense Priorities for a 21st Century Transformation

Dr. John H. Hamre

Analysis

A robust defense industry will be indispensable to the transformation of the U.S. Army and the other Services. The "herd mentality" that has impelled many Americans to invest heavily in unproven high-tech companies based largely on their expected future earnings could damage the defense industrial base. Equity prices for such companies have risen quickly, while defense companies with proven earnings records have suffered sharp declines in their stock valuation. The quest for higher short-term profits could induce defense companies to reduce R&D spending or possibly even to get out of the defense sector altogether. Corporate downsizing could result in a hemorrhage of scientific and managerial talent. This shortsightedness could have severe repercussions for the future of the U.S. industrial base. A fundamental rethinking of the relationship between government and industry should be undertaken in order to compensate for such negative trends. Innovations could include easing regulations and accounting rules, as well as greater efforts to procure defense-related items from commercial vendors. U.S. national security will ultimately rest on the preservation of a thriving, profitable, and innovative defense industry.

There are several "first principles" for maintaining viable defense firms. First, more stable defense budgets must prevail over the rollercoaster budgeting of the past fifteen years. We must avoid the tendency of legislators to take contradictory actions. During the FY00 budget debate, for instance, Congress first passed an authorization bill that boosted spending, followed by an appropriations bill mandating across-the-board spending cuts. Stabilizing procurement budgets will be particularly critical in the future, since the acquisition community has borne the brunt of the drawdown over the past decade. Severe reductions in procurement threaten the base of engineering and design expertise that sustained the United States during the Cold War. We must improve the acquisition process by adopting approaches such as multi-year contracts to assure greater predictability and stability for defense firms. The government should avoid such acquisition practices as fixed-price development contracts that place excessive risk on the private sector thus creating an inequitable partnership between government and industry. Acquisition decisions should be coordinated across Service lines in order to prevent a decision by one Service or civilian agency from undercutting the industrial base on which the other Services rely. Finally, maintaining competition in the defense sector is essential to promoting innovation and mitigating costs. While some defense consolidation was an inevitable outgrowth of the drawdown, the Department of Defense is now less inclined to approve future mergers and acquisitions.

The recent trend toward international alignments of defense firms deserves further scrutiny. The technological gap between the U.S. and NATO European armed forces was highlighted by Operation Allied Force. This suggests that greater international defense industrial collaboration could be part of the solution. However, there are two nearly insuperable (at least over the short term) obstacles to transatlantic mergers and acquisitions. First, the U.S. and NATO European governments have not yet developed the infrastructure needed to manage the industrial security problems associated with transatlantic defense industry consolidation. Second, the companies themselves are not freely prepared for the inevitable turmoil associated with such a mammoth undertaking. Indeed, transnational defense mergers have encountered severe difficulties even within Europe. Nonetheless, greater international collaboration could help to buttress NATO interoperability and prevent the emergence of a Fortress Europe and a Fortress America. Governments on both sides of the Atlantic should encourage defense industrial cooperation wherever it has genuine merit.

The estimated DoD's annual budgetary goals in Procurement and R&D are too low to maintain long term technological superiority. A combined goal of $90 billion has been established for these two areas. Of this total, $60 billion would be designated for procurement and $30 billion allotted to R&D. These goals will likely be met and they will probably be exceeded in the out years of the next Future Years Defense Plan. Procurement spending could range as high as $73 billion in these years. Effort to modernize the force should not be sacrificed to fund short-term operations and readiness, as has often been the case in the past. Modernization is the best way to preserve U.S. military strength in the rapidly changing security setting of the early 21st century.