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Contractors respond warily to Pentagon vow to preserve industrial base

Top acquisition chief invites struggling companies to talk.

Just days before the expected Feb. 13 release of President Obama’s fiscal 2013 budget, the Defense Department’s top weapons buyer sought to reassure nervous contractors that the White House will protect vital industries even as it implements major cuts in procurement and personnel spending.

Frank Kendall, acting undersecretary of Defense for acquisitions, technology and logistics, told a Monday forum at the Center for Strategic and International Studies his highest priorities include beefing up the federal acquisition workforce, strengthening the military industrial base, preserving technical superiority, and buying into only affordable and dependable programs.

He also suggested that the Pentagon might intervene to help key contractors that are struggling in the current economy. “When people see that there’s a supplier who is in trouble, or they’re in trouble themselves, they need to come let us know,” he said, according to an account in National Journal . “When they look out and see their business base eroding, or see that they’re not going to be viable for whatever reason, we need to know that. Then we can do assessments that look at whether we need to maintain competition there, whether it is a nice capability that we need to continue to support -- how we might intervene.”

Fred Downey, vice president of national security at the Aerospace Industries Association, told Government Executive that “ongoing reductions in defense spending coupled with the threat of sequestration cuts are causing a great deal of concern among smaller companies in the supply chain. Many of these companies have unique capabilities that could be lost if their workflow is interrupted by cancellations and delays.” He added, “Kendall’s comments could lead to positive action to sustain critical small suppliers. We look forward to more discussion about how the Pentagon would go about executing such support.”

Alan Chvotkin, executive vice president and counsel of the Professional Services Council, which represents contractors, said the comments were “reassuring in that they demonstrate renewed attention at high levels. But a bailout, for lack of a better word, should not be counted on as a strategy by companies as the Pentagon takes steps to make sure the supply chain is not disrupted.”

Both the budget cuts now being prepared by Obama defense strategists and the additional reductions that could be mandated next year under the 2011 Budget Control Act have fueled concern about long-term dwindling of the nation’s defense-related industrial infrastructure.

House Armed Services Committee Chairman Howard “Buck” McKeon, R-Calif., sounded the alarm in January after the Pentagon released its latest strategic guidance. A fact sheet his committee released warned that “industry cannot be turned on and off like a light switch [and] requires a steady, enduring partnership that allows for innovation, expertise and growth.”

It said the Pentagon’s planned cuts would result in delays or a shutdown of production lines that would cost highly skilled manufacturing jobs.

Two defense analysts who spoke to reporters Wednesday at the Center for Strategic and Budgetary Assessments expressed similar worries. “The industrial base is not like Wal-Mart, where you can count on things being on the shelves when you walk in,” said Andrew Krepinevich, CSBA’s president. “The industrial base is a strategic asset, a weapon” that imposes enormous planning problems on potential enemies, he added, noting the British allowed their air and maritime industrial base to decline in the 1930s and again in the 1990s. “These companies trade on Wall Street, and eventually the money will go somewhere else.”

Todd Harrison, a senior fellow in budget studies at CSBA, said the number of prime defense contractors has shrunk from about 30 in the 1990s to five or so today, creating a near-monopoly in the industry. He predicted that severe cuts would prompt some companies to “get out of the defense business or consolidate, and you may see a reduction in capacity, in the number of factories.”

Kendall stressed the importance of leadership to create a cost-conscious acquisition workforce. But both defense analysts said they were skeptical that the Pentagon will succeed in its goals of achieving $60 billion over 10 years in savings through “efficiencies” in areas such as operations and maintenance. “It’s long been tried, but they don’t end up getting anywhere near what they’d hope for,” Krepinevich said.

The Pentagon’s initiative to insource more contractor work and build up the acquisition workforce, Harrison said, was a priority of former Defense Secretary Robert Gates, and might well become unworkable because of coming budget cuts. “We’re likely to see significant reductions in the DoD civilian workforce,” he said. “It’s hard to bring contractor expertise in-house when contractors have higher paying jobs.”