Commercial or military, autarkic or globalized, public or private?

What are the industrial base issues that need to be considered in any defense strategy? In this age of austerity in military spending, we are hearing calls for bolder policies that would break with past practice, rewarding companies for taking risks, and punishing those that failed. We hear assertions that defense ministries should think seriously about what capabilities they want to preserve as economic constraints force choices in future force structure, and ultimately strategy. We should applaud these  efforts to highlight industrial considerations in formulating strategy, for the question remains fresh. But in thinking about formulating public policies in this area, I believe that an overarching framework is important. I recommend orienting on three dimensions, each of which encompasses a spectrum of potential defense-industrial policies.

The first is civil-miliary integration, which concerns how much the industrial resources on which any defense ministry relies should be commingled with civil technologies and a commercial business base. Should military programs consciously draw on commercial ideas, or be deliberately nurtured in isolation? The trend since the end of the Cold War has been toward a closer integration of defense and commercial industrial resources, and a pure ‘hot-house’ approach is nearly impractical today. Still, military and commercial technologies do not always naturally commingle, so substantial issues remain about exactly how any defense ministry can encourage—or just resist impeding—the integration of civil with military industrial resources. For us, this broad issue points to several specific questions today:

• Should the Pentagon be concerned that hardware-oriented defense companies are dis-integrating themselves from information technology businesses? I am thinking here of Northrop Grumman’s sale of TASC, L-3’s spinoff of Engility, and SAIC’s split.
• Would a more thorough integration of defense and commercial aerospace strengthen the defense-industrial base, and should public policy encourage or discourage it? For example, how important to the ‘defense’ industrial base are commercial satellite communications, space launchers, business aircraft, and trucks?
• What, if any, are the implications of the dust-up over Palantir versus the Army’s Digital Command Ground System?
• And drawing on the speech by Textron Systems CEO Ellen Lord here at the Council in January, I wonder whether the Pentagon is better served by industrial resources that are commingled in multi-industry firms, such as United Technologies and General Electric, or pure-players, like Exelis?

Our second issue is interdependence, which concerns how autarkic or globalized a nation should be in sourcing its weapons. Over the past twenty years, a substantially globalized industry has emerged from a fragmented collection of largely national structures. Autarky is not only out of fashion, it is also infeasible for all but the largest nations: even the United States has affirmed a strategy that positions its industry in the global marketplace. Yet there remain substantial issues about how to balance a national industry’s interdependence with the concurrent need of attending that country’s security and economic objectives. Again, I think of specific questions: 

• Looking back over more than a dozen years of corporate and public policy initiatives to draw the industrial resources of North America and Europe together, what has it achieved and what is to come?
• Looking ahead to an era of austere defense budgets in the West, US and European companies are going to rely more heavily for their growth and profitability on exports to emerging-market countries. Is US public policy ready to accommodate—or even encourage—these imperatives? 
• How great is the threat that global sources of supply will compromise or sabotage US military technology as more and more of the upstream components and assemblies in our systems originate overseas? 

Other than nuclear matters, should the United States, as a matter of policy, still cultivate any segments of the defense-industrial base on an autarkic basis?

The third issue is capitalization—how much a nation’s defense-industrial resources rely on public or private investment. While government ownership of defense-industrial resources has generally decreased since the end of the Cold War, the pace and depth of that evolution varies from one nation to the next, and the question of how defense-industrial resources are capitalized remains deeply complex. Even in a market like the United States, which has very little modern tradition of state ownership, the determination of its capitalization position is complicated by the fact that the Defense Department routinely makes substantial capital investments in companies to develop its acquisition programs. It also maintains a large, government-owned industrial base of depot maintenance and munitions facilities. For most ministries, the practical issues probably have less to do with whether the government should capitalize new defense companies than with whether and how to share with private investors the risks associated with new projects, and with the disposition of the military’s legacy of industrial assets. Yet more questions come to mind:

• Does the Pentagon’s ‘Better Buying Power’ policy signal a meaningful change in acquisition practices over the extent to which it will continue to bear the financial risk of investments in dual programs? Can contracting practices accommodate the need for higher return to companies that have themselves borne the risk of development without government funding?
• Can we consider United Launch Alliance and the Electric Boat-Newport News submarine partnership indicators of an industrial policy that recognizes the need, in certain mature sectors, the need for regulated monopolies, operating like utilities?
• Will government continue to own and operate an entire industrial base for equipment maintenance and munitions production into the 21st century?
• Are there certain niches of the defense-industrial base for which public ownership is the most efficient capitalization?

Commercial or military, autarkic or globalized, public or private? In each dimension, contracting spending will likely move the optimum balance for industrial policy. Smart stewardship of defense-industrial assets means addressing these issues strategically, and not as an artifact of decisions made program-by-program.

Steven Grundman is the M.A. and George Lund Fellow for Emerging Defense Challenges at the Atlantic Council.