Podcast: Building A Resilient Defense Industrial Base

Jen DiMascio:

Hi, and welcome to the Check 6 podcast. I'm Jen DiMascio, theExecutive Editor for Defense and Space. And I'm here with MichaelBruno, our Executive Editor for Business, Defense Editor SteveTrimble, and Pentagon Editor Brian Everstine. And we've come up toa quiet room at the Watergate Hotel where we are hosting the AviationWeek A&D Programs Conference, the theme of which is BuildingResilience in the Supply Chain. And so we've heard from executivesfrom Northrop Grumman, we've heard from current and formerPentagon officials, we've heard from the CEOs of startup companies. And all approaching this theme of Resilience in the Supply Chain in atenuous strategic time. And so I want to ask you, Steve, to start us offwith your impressions because wow, we really covered the waterfronton this question of resilience from so many different points of attackand learned so much this week.

Steve Trimble:

Yeah, just two days at this conference, what we're really hearing aboutat a very high level, we're seeing this huge demand signal in thedefense industry, aerospace and defense industry for all kinds ofthings. I mean, we talked to the COO of Northrop Grumman, MattBromberg, just what he's dealing with right now, he's got a scale-up, or a ramp-up production of B-21, GBSD. He's trying to get CCAs oncontract. They're still in the mix for the Navy's Next Generation AirDominance F/A-XX program. They're right in the middle of rampingup production of hypersonics or ramping up development, I shouldsay, of hypersonics with a scramjet-powered cruise missile program. So that's just one company, right? But this is all throughout the supplychain, you've got F-35s waiting to get delivered because of supplychain issues. And we've gone through, so there's this huge demand-pull, and then there's fluctuations in the supply chain, disruptions inthe supply chain.

There's all these efforts to expand it by bringing in new companies, non-traditional companies, small companies, VC-based startups, a lotof whom we've heard from during this conference. As well as the bigcompanies, how they're trying to expand their footprint by moving todigital approaches to design and production industry 4.0 methods todramatically expand productivity and the pace that they can respondwith new technology, right? And there's a lot of different facets of that. There's an industry piece, there's a regulatory piece, there's agovernment piece, there's an oversight piece, and all that sort of has toget aligned. And so we sort of talked about that from all these differentangles during the show.

Jen DiMascio:

Brian, you started off with the first panel from the government side, how the Pentagon plans its budgets and how it's reforming the processfor doing that, but it doesn't seem like they're doing all that much. Isthat correct, Brian?

Brian Everstine:

It's a matter of perspective, I'd say. So we started off with threemembers of the commission on planning, programming, budget andexecution. We had Chairman Bob Hale, former comptroller, we hadArun Seraphin. And we had our Laura Sarah, the executive director. Congress and the 2022 policy bill gave them no easy task of looking athow to improve the decades and decades-old PPBE process. They didhundreds and hundreds of interviews and DoD Congress acrossindustry to try to find ways to smooth out a process that has becomebogged down, become very slow, especially at a time when thePentagon is really trying to move faster.

And they had their interim report a couple of months ago. They'regoing to come out with their final report and recommendations inMarch, and they have a pretty long list of recommendations. Now, ifyou think it's going to do enough, you think it's going to make adifference at all. It's kind of a matter of your perspective. They'relooking at ways to improve communication between DoD andCongress. They're looking for ways to give a little bit more flexibility, for example, a mid-year budget update from DoD to Congress, potentially combining some line items within the budget proposal. Sothey're-

Jen DiMascio:

Brian, let me stop you there. Why is that important? What could thatallow, and what are some of the programs that we've talked about thatmight really benefit from that kind of flexibility?

Brian Everstine:

... Well, for those of us who have been fortunate or unfortunate to lookat J-Books and look at that, and actual budget documents, there arethousands upon thousands of line items. And it's really hard to reallywrap your head around about the strategy there. One of the majorrecommendations they had was try to find a way to link budget tostrategy. And there are ways that the Pentagon has been able to getaround this very bogged-down system. We had the examples ofMRAPs, for example, Operation Warp Speed, that there are goodstories there, but they're very much the outliers. And there's an openquestion of way to make those good stories become more regular.

Steve Trimble:

Well, yeah, I mean, so the MRAP push and 0peration Warp Speed, which was the COVID response that was led by the DefenseDepartment. They were outliers because it required personal andsignificant intervention by the Secretary of Defense to overcome thelimitations of what they call the planning, programming, budgeting, and execution cycle. This thing that takes two years from start tofinish, usually in a good process on a lucky day. What they want to dois find a way to regular or to standardize that so it doesn't require thatkind of high-level personal investment by somebody who probablyhas many other things to be doing and on their table.

I mean, we've heard about concepts like replicator that hasn't reallybeen flushed out yet, but we've understood, and we reported on theseconcepts and ideas for making replicator a way of essentiallybypassing the PPB, if they can do that, to get things to the commandand commands directly without going through the military servicesand this process if possible, right? But there's still a lot of issues todeal with that even if that were to happen. But it just sort of speaks towhen we're talking about this demand signal, it's all different levels. It's at these very high-end sophisticated platforms. It's also at the verylow end, the commercial UAS and also just products that are availableright now, they're ready to go, they're mature, but because of thisprocess, it just takes forever to buy them. In some cases, companiesjust can't wait for the Pentagon to do it. And we heard from companieslike that.

Jen DiMascio:

Yeah, I was really struck by the innovation that's been happening, butalso some of how the process gets in the way of itself, not just on thatbudgeting side, but the supply chain and some of the problems that it'sfacing that we talked about, or that the panel that you moderated nexttalked about. Maybe you could touch on a couple of those.

Steve Trimble:

Sure. So we talked to a couple of small companies that came in to talkto our conference. One was Shift5 that has a software platform for ... Actually, they do cyber protection for aircraft with some reallyinteresting work there, and also predicting maintenance requirementsusing software algorithms. And another company called goTenna hasdeveloped a new tactical mesh network radio that can work with aspecific approach they're taking, even in regions of intensecommunication jamming, they're still able to get their signals out totactical users. And the U.S. Navy is very interested in that. And bothof them have platforms that are ready to go or products or services thatare ready to go. They've demonstrated it to DoD customers who likewhat they see, have given them small R&D awards to try to keep themgoing, but they're for the most part, sitting on hold waiting for thisPBB process to work itself out.

So when they're talking about expanding the industrial base, thePentagon has been really good so far at recruiting these companiesthat have a lot of commercial-facing products and services to kind ofpivot and see if they can apply these in the defense space, in thegovernment space. And so they do, and there's interest and there's aclear need or use case for it. But because there has to be thisadjudication process that takes so long, they have to sit there and wait.

And then after demonstrating it and going through this process ofgetting it demonstrated so that the military knows it meetsrequirements, then they have to go into this pausing period where theyjust wait for a decision and then they have to if it all works out andthey get the program of record, they have to scale up at the level of theDepartment of Defense immediately. And for a small company, you'reasking for several sequential miracles for that to happen, for theirfunding to last, for their engineering staff to stay engaged, for theirinfrastructure to be there when it needs to be. It sort of clarified someof these issues that we keep writing about and why those issuesresonate so much in all these policy discussions and so forth.

Jen DiMascio:

I mean, that's really on the small side, but there are, on the largecontractor side, some real difficult challenges ahead. Maybe you couldelaborate on some of those, Michael.

Michael Bruno:

Yeah. So it's interesting. There are a couple of themes that seem to beemerging from our conference, the A&D Programs Conference here, and Steve talked about in the beginning, this huge demand signal. Andit's worth clarifying exactly what that demand signal is. We are tryingto, we, the U.S., and the West are trying to be prepared for a potentialwar over the Taiwan straits with China around 2027. So here we are, late 2023, it's November 2023. That means that you're roughly four, five years away from that happening. And in the defense acquisitionprocess and the defense industrial base cycles that they go through, that is almost tomorrow. But that is not how our system works, whether by government acquisition, or the industrial base, how theyformulate markets they're going to go after, how they're going to standup factories, who they're going to recruit, what weapon systems theywant to operate or want to pursue as franchises.

These are really quick, Steve talked about trying to bring in youngsmall companies, and the primes have certainly been doing that nowfor about a decade, whether it's through corporate venture capitalpartnerships or just acquiring them outright and ingesting some ofthose technologies. But time and time again, as both Steve and Briantalked about, we have these stubborn issues. The adversary may havechanged, the battle zone may be looking a little different with theweapons that are required, but the marketplace still needs to know thatthere's going to be a reliable market in a couple of years for theproducts that they provide. Otherwise, you're not going to get theLockheeds and the Northrops to go invest in them. They also need toknow that money is going to flow relatively reliably throughout thiswhole process, and it's not going to get gummed up in politics, whichis impossible because this is Washington.

So the industrial base is looking at that demand signal and saying, "We're ready to go." And the government's saying, "We're ready to goto try meet it." But these same stubborn issues keep sticking around. And I will just follow on by throwing out one kind of tangent that I'mshocked by, but maybe I shouldn't be, which is here we are looking atgearing up for a next possible major battle, a major war. And theindustrial base in the U.S. is saying, "We need help to work with ourallies and to form a more global industrial base." And that's one ofthese issues that this city is still trying to wrap its head around fromfive, six years ago about how much do you want to try to bring jobsback to America and grow jobs here versus how much you're willingto partner somewhere else just to provide the capacity you need forwarfighting.

Brian Everstine:

Well, I just wanted to add on that note as we talk right now, thePentagon said a couple of weeks ago that they're sharing theirupcoming industrial-based policy with international partners. We'resupposed to see that released in a few weeks. I think it's pretty hotlyanticipated. So hopefully, that might iron out some of the strategy, butit's still up in the air.

Steve Trimble:

Well, we had a panel discussion here with the industrial-based policyoffice from the Office of the Secretary of Defense, talking about thefact that, I mean, yes, we are waiting for the industrial-based strategyto come out. I mean, most strategy documents never have the kind ofclarity and detail that I sort of crave from those kinds of documents. But in the meantime, I mean, they're already sort of moving with theirfeet, right? I mean, they've got four and a half billion dollars, or a bitmore than that put into the six-year defense plan from fiscal year 2022up to 2028, going after gaps and seams in critical defense supplychains. Things like just last week awarding a contract to a companycalled Hyperion X to reestablish titanium sponge production, titaniumbeing one of the most important critical metals for defense programs.

Michael Bruno:

That we don't want to buy from Russia anymore.

Steve Trimble:

From Russia or get it processed from a Chinese-owned companysomewhere. I mean, there are other companies that are affiliated withour allies, Japan and Canada, and Ukraine actually are robust titaniumsources. But there is none in the United States because it's a very high-energy product. And we're a high-cost country for high energy typeproducts. So it's all moved offshore. There's a company that's broughtin, they have a whole new process, totally different than the coalprocess's been around since the thirties. Anyway, I can go on to allkinds of detail on that, but I suffice to say that's happening. They'vealready made 21 awards this year worth something over $640 millionjust this year. There's another $960 million planned to be spent nextyear on this if the fiscal year 2024 budget actually gets passed at somepoint. So I mean, there's a lot of energy and activity in that.

Again, though, there's still these, even if the money goes in and there'sstill issues with how you assign that money and how you trackwhether it's meeting policy goals because this is governmentintervening in private markets and a free market economy. And there'skind of distortions that get put in there. Again, although these are forraw materials and microelectronics and things that the U.S. marketsimply isn't providing right now. But still, you run into these issueswhen these ideas and these policies and these new products and newcompanies sort of interface with the acquisition bureaucracy, there arestill these meltdowns. I mean, the best anecdote I heard was from acompany who talked about going to a government-hosted innovationday, an innovation pitch day. And this is the product of this hugeinvestment the DoD has made in AFWerx and AFVentures and Softworks and army innovation and navy innovation type things tobring in these companies and try to recruit them to join, to offerneeded technologies and services.

And yet, they come to this innovation day, they win the innovationday hosted by this military organization that they didn't want to name, and then there was no money. They had not budgeted to actuallyaward a contract to the winner of this pitch day. So they had to wait ayear for a contract to come through, a very small R&D contract tocome through based on winning a pitch day that was hosted by thegovernment but without any money. So these are the kinds of thingsthat just sort of stagger your mind that that's possible, given the top-level language and the support for it. But you still see those kinds ofthings pop up all the time.

Jen DiMascio:

Well, that's unfortunately about all we have time for, but I'm going toclose out with just a couple. And we talk about a lot of the problemsand the doom and gloom, but there were a couple of bright spots that Iwanted to touch on before we head out and head back into the nextsession. And what I'm feeling like is a retreat for defense industrialbase geeks. But anyway, just a couple of interesting space programsthat we talked about this week. One is VICTUS NOX, which was theSpace Force's effort to rapidly launch small satellite, not just to rapidlylaunch it, but to get a payload on it. Get it made it into the fairing andget it put on orbit, and they did that in record time. So we had theCEOs of Firefly Aerospace and Millennium Space here to talk aboutwhat they did. We heard from an official from Raytheon on how theygot NASAMS rapidly outfitted for the Ukrainians.

Steve Trimble:

Was shockingly, in shocking speed. I mean, within three months, anentire contract executed and delivered with trained Ukrainianoperators from the start of that to the end was shocking. But they alsotalked about how the extraordinary steps-

Michael Bruno:

How unsustainable, it's a heroic effort. But just going back to theMRAPs, it's like that all over again. We can do heroic efforts, but canyou fight a war and have an industrial base that's depending on that? No.

Jen DiMascio:

And that's a great note to close out on. Join us next week for anotheredition of Check 6. Bye-Bye.