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Conventional arms transfers can have separate, microeconomic effects of interest to a discussion of economic security, including effects on innovation and manufacturing highlighted in the Presidential Memorandum. The defense industry is not like a normal commercial industry, where corporations use retained earnings from their past sales—or borrowing from investors, who expect to be repaid from future sales revenue—to invest in research and development. Innovation in the defense industry is mostly supported by direct government research and development (R&D) contracts. That is, the DOD customer directs the trajectory of innovation and pays for specific R&D effort. Another fraction of total defense R&D comes from companies’ Independent Research and Development (IR&D) expenditures, reimbursed by the government as part of the overhead cost of other government-funded defense projects. IR&D spending is company directed, but it is also paid for by the DOD customer, not drawn from the company’s retained earnings. As a result, general increases in defense firms’ profitability—which might stem from arms sales approved under the CAT policy—do not generally have much effect on defense innovation at the systems level. However, many suppliers in the defense supply chain operate on commercial terms, and for them, the general added revenues from expanded defense sales contribute to the retained earnings that support their R&D investment. Thus, at the supplier level, arms sales can contribute to US innovation. However, generally, the suppliers are less visible, as are the innovations they might choose to invest in with the marginal dollar of income. Due to that lack of visibility, it would be difficult for an economic assessment, as part of the CAT approval process, to give much weight to the potential innovation-related investments by commercial firms at lower tiers of the defense supply chain

The decline of the defense industrial base as a driver of the overall economy is reflected in the Fortune 500 listings. In 1961, 15 defense companies were among the top 100 companies listed. In 2017, only four aerospace and defense companies were ranked above 100. Of these, only two—Lockheed Martin and General Dynamics—were primarily defense companies. The other two—Boeing, the highest ranking of the four at 24, and United Technologies—are major providers of defense products but receive a large percentage of their total revenues from commercial sales.40

Gaining Leverage over Vendor Lock to Improve Acquisition Performance and Cost Efficiencies; The MITRE Corporation; https://www.mitre.org/sites/default/files/publications/gaining-leverage-over-vendor-lock-14-1262.pdf

The value of competition has been incorporated into every major piece of Federal legislation on acquisition reform and is continually touted in political speeches and public engagements. The Department of Defense (DoD) strives to foster competition; however, like many Government agencies, the DoD tends to view competition as an activity that occurs only during the initial contracting process, rather than as a dynamic tool for achieving success over the life of a program. Most DoD programs today award development and production contracts to a single prime contractor or contractor team. Using this single-provider approach, the DoD fails to maintain continuous lifecycle competition—the use of competition to motivate contractor performance throughout the life of a program. As a result, too many DoD acquisition programs fail to achieve their cost, schedule, and performance objectives. Competition is an extremely strong motivator: the forces of competition act as an “invisible hand” to self-regulate contractor performance. Contractors tend to keep each other in check, and the Government greatly benefits from, and is protected by, the nature of competition. Extensive historic data on DoD programs has shown that costs consistently decline in a competitive environment, while performance and reliability increase. A 2001 study by the RAND6 Corporation showed that the introduction of a second source during the production of the Tomahawk missile led to estimated savings of $630 million, while improving the missile’s reliability from approximately 80% to 97%. The same study also revealed that the ten DoD aircraft programs that involved no competition during the production phase experienced an average 46% increase in cost over the original budget. (CSIS)7 By contrast, a single-provider environment produces smaller performance improvements, longer schedules, and higher costs. Schedule delays and cost overruns consume significant resources; for example, a 2011 study by the Center for Strategic and International Studies found that 32% of the single-award contracts let after full and open competition with multiple vendors experienced overruns, at a net cost to the Government of $19 billion over the life of the program. Since programs experience fewer overruns and delays in a continuous competition environment, the DoD can invest less time and money overall in managing its programs. Avoiding and breaking vendor lock can be accomplished by creating an environment of continuous competition in both development and production. This paper addresses several techniques to keep a second or third vendor in the game by offering shared contract dollars to pursue alternative technologies, and shared contract quantities to maintain a production capability at low levels. As a result, the single vendor does not have a lock on the business or technology.

Investigative reporter; America’s Wal-Martification of War; Lee Fang; https://www.leefang.com/p/americas-wal-martification-of-war

The underlying economic dynamics behind the artillery shortage showcase the short-term financial thinking that has remade much of the American economy over the last quarter century. This dynamic of rapid corporate consolidation isn't unique to the defense sector; similar patterns are evident in hospitals, airlines, and even eyewear, all suffering from monopolistic practices that yield high profits but fragile supply chains. To understand the shell shortfall and the business decisions that contributed to it, the history of the Scranton Army Ammunition Plant -- which manufactures most of America’s metal casings for 105mm munitions, 120mm mortars, and the heavy-duty 155mm rounds fired by howitzers, the most needed arms on the Donbas front -- is a case in point. Spun up during the Korean War to churn out artillery casings, the plant, nestled in a coal-rich valley in Pennsylvania that was once home to much of American steel production at the height of the Gilded Age, has since faced decades of neglect and corporate downsizing. General Dynamics (GD), one of the major defense conglomerates, acquired operational control of this Army-owned factory during a period of outsized and lightly regulated mergers and acquisitions. GD, the Virginia-based contractor with a market capitalization of nearly $80 billion, started as a submarine shipbuilding concern but has since broadened its reach to information technology, tank and armored vehicles, business jets, and various naval vessels. It has also focused intensely on the ordnance industry and came close to cornering the artillery munitions market. In 2006, investor records show, the firm spent $2.6 billion acquiring four competitors, including SNC Technology, the largest artillery munitions makers in Canada, and the Chamberlain Manufacturing Corporation's munitions division, the old Scranton arms factory operators. During this period, tepid regulatory oversight meant the Federal Trade Commission raised concerns that GD would control the entire medium and large munition market but did the bare minimum in terms of preventing it. GD was given a green light to merge, swallowing up most of its competitors in the ordnance and heavy-duty munition market, but was forced to divest its 50 percent stake in a joint venture with Day & Zimmermann, one of the only other firms that produce the 155mm munition. The cutbacks soon began. In 2010, the local Scranton GD moved to lay off 56 employees at the Scranton factory. Two years later, there were much deeper cuts. The company announced that a quarter of the remaining workforce would be let go, leaving the plant with fewer than half of its employees when GD acquired the facility. "In raw numbers, 60 or so is not huge, but if you look at the nature of those jobs, their skill level, the technical needs and experience there, it is extremely problematic," Teri Ooms, an economic analyst, told the local Times-Tribune newspaper at the time. Notably, Day & Zimmermann, which operates the Iowa finishing plant for most 155mm munitions, had shuttered its Kansas munition factory, the main competitor to GD. That closure was only a year before the cuts began at the Scranton plant, leaving little production capacity. The same story played out around the country as GD, Lockheed Martin, Raytheon, Boeing, and Northrop Grumman, known as the Big Five of defense contracting, increasingly concentrated ownership of the entire defense industrial base and found efficiencies with plant closures and workforce reductions. Wall Street applauded the financial moves at time. In 2016, Phebe Novakovic, the chief executive of GD, boasted on a quarterly earnings call with investment banks about the company's Ordnance and Tactical Systems division, which includes the Scranton plant. “We had terrific margins out of that business after we consolidated two units," Novakovic said, according to a transcript of her remarks. Profits from consolidation were largely funneled back to investors. The Defense Department reported last year that major publicly traded defense contractors devoted $240 billion to dividends and stock buybacks from 2010 to 2019. The report added that the companies spent much more money on enriching shareholders than on research and development.

Across the United States Department of Defense, restrictive software license practices have increased the amount spent on cloud computing and restricted choice of cloud service providers, found the country’s Government Accountability Office in September 2023. Some software vendors have limited the use of their software to only selected cloud providers or charged extra fees to use their software with third party cloud providers, highlighted the report. The Office recommended that the Department fully identify, analyze, and mitigate these impacts. Such restrictive practices could cost European businesses and public sector organizations over a billion Euros a year, alleges a new report commissioned by the nonprofit organization, Cloud Infrastructure Services Providers in Europe (CISPE). Global competition authorities, like the United Kingdom’s Competition and Markets Authority, are currently investigating these vendor practices, alongside claims that large cloud providers also make it difficult to use multi-cloud architecture and more expensive to transfer data, according to The Register. GovInsider speaks to the report’s author, Frédéric Jenny, Emeritus Professor of Economics at ESSEC Paris Business and Co-Director of the European Center for Law and Economics of ESSEC to learn more about the impact of such practices. Study finds that legacy software providers bundle software with infrastructure His research has found that legacy software providers often bundle the use of their dominant software systems with their cloud infrastructure, making it difficult for customers to switch to independent cloud providers even if they wish to. “In other words, they impose costs on firms if the firm's clients do not use their own cloud infrastructure and if they want to move that data to an independent cloud infrastructure provider,” says Professor Jenny to GovInsider. For example, organizations who license Microsoft’s SQL Server in an independent cloud rather than on Microsoft Azure may have had to pay an additional 28% to do so. This was the result of a policy change in 2019 which ended users’ ability to deploy their existing on-premises Office software licenses on third-party infrastructure. This may have resulted in first-year license repurchase costs, equivalent to 560 million Euros (nearly 600 million USD) for the European market, according to the report. Other restrictive software licensing practices include making it more expensive for firms to transfer data or storage to an independent cloud provider, limiting their software’s interoperability on other providers, and giving software discounts to firms who use their cloud infrastructure, says Jenny. Over the course of his research, Professor Jenny spoke to more than twenty large cloud users across Europe to collect first-hand testimonies of such practices and analyzed price discrimination to determine the total potential costs. Slowing competition in the cloud space These practices can unfairly reduce competition and raise costs, says Professor Jenny. “Buyers were under a lot of pressure, which they tended to consider unfair or anti-competitive, limiting their ability to choose their infrastructure providers,” says Jenny. These practices make it difficult for independent providers to access the market, he explains. According to Statista, independent providers have gone from holding nearly 50 per cent of the cloud infrastructure market share to only 18 per cent of the market in 2022. This benefits firms which can provide both cloud infrastructure and software, he notes. As the market becomes more highly concentrated, large legacy firms can charge more for their services as it is harder for customers to turn to independent providers. “There is an element that suggests that maybe this evolution is not entirely due to the fact that they are more efficient, but because there may be practices which would be worth investigating, because they could be either anti-competitive or unfair,” he says. He urges competition authorities to investigate these practices and determine whether these players are leveraging their market power to distort competition. He highlights that such practices affect all markets.

Gaining Leverage over Vendor Lock to Improve Acquisition Performance and Cost Efficiencies; The MITRE Corporation; https://www.mitre.org/sites/default/files/publications/gaining-leverage-over-vendor-lock-14-1262.pdf

Examine IP Rights - The Program Office should assess all proprietary aspects of the proposed technical and engineering solution and negotiate optimum data rights. IP ownership can drive costs up because the owner naturally wants to recoup investment costs through sales of its products. Thus, vendors have motivation to declare IP ownership. To overcome this issue, the U. S. Military must fully leverage all license rights for IP to which it is already entitled. The development and production contract negotiating position can consider cost efficiencies in technical data procurement and software reuse as well as the maximum use of open source software. Supporting activities for this approach include: • Conduct an audit of IP and proprietary IP claims. The Program Office should challenge restrictions placed on IP by the vendor in its contract and in any production change proposals. Vendors develop IP both under Federal contracts and at their own expense. The lines can become blurred, especially if individual customers (such as the various military buyers) impose unique requirements. This is especially true with the emergence of Open Systems Software (OSA) and data rights addressed early in the life cycle. The Program Office should communicate with the other Military Services doing business with their prime vendor on similar systems to verify and validate which IP the Government has already acquired under development and/or production contracts and determine the total extent of Federal government IP. The Program Office should consider using software tools, such as the Open Source Software Scanner (OSSS),8 to determine if the software includes open source code that may provide the government with additional IP rights at no additional cost. Software-intensive systems share the common problem that vendors use recycled code to streamline the software production process. Sometimes vendors incorporate open source code in their systems and then claim restricted/limited rights over the resulting IP. In these cases, the Government may employ various software code scanning tools, such as OSSS, to discover any open source code embedded in its systems, and use these results as leverage over a contractor who wrongly asserted limited/restricted rights over IP that it did not actually possess. Such an activity could be a precursor to a broader discussion regarding the source of all software code and associated claims of IP license rights, and could support a decision to audit the current state of a program’s IP license rights. The Program Office should include provisions in the contract that require the vendor to provide a detailed approach on use of open source software and associated cost efficiencies. The Program Office should use this information in analyzing the vendor proposal incorporated into the final contract award to determine inconsistencies or redundancy in IP between the proposed solutions. • Assess what the Government has and may need in the future. The Government typically has more IP rights than it realizes because an issue may not have been fully explored during the contract negotiation process. The Program Office should assess its current IP license rights versus rights it might need to ensure the prospect of future competition for the product or technology. If they obtain full Government Purpose Rights (GPR) for key pieces of IP in the system, it can initiate separate competition among other vendors for those subsystems or components. As noted earlier in this report, a recent change in the law now makes the contractor responsible for defending assertions of limited/restricted data rights for commercial items developed completely at private expense.9 The Program Office should seek advice from legal counsel about implementation and application of this new legislation. The Program Office needs to analyze GPR on past and current product contracts, utilizing Defense Contract Management Agency (DCMA) records for other U.S. military contracts with similar GPR provisions where available.

To aid in incentivizing investment and development of warfighting solutions by the DIB, Congress could direct DOD to increase its protections of private sector IP rights. However, such protection could potentially limit DOD’s rights to the IP and technical data associated with weapon systems developed in whole or in part by private industry. Some implications include “vendor lock,” a situation where the government is effectively forced to continue working with the sole contractor who can provide or repair a specific part or piece of equipment. Some analysts argue that when DOD does not have IP rights, entities have minimal incentives to respond to government requirements for delivery and performance, and may not be willing to negotiate a fair and reasonable price for affected items. Further implications include issues associated with program upgrades and sustainment costs over the lengthening lifespans of some DOD weapon systems.

February 2022, " State of Competition within the Defense Industrial Base," Department of Defense, https://media.defense.gov/2022/Feb/15/2002939087/-1/-1/1/STATE-OF-COMPETITION-WITHIN-THE-DEFENSE-INDUSTRIAL-BASE.PDF, Pg. 12 // QUEERAMID

However, the government’s increasing reliance on commercial or commercial-derivative technologies, even as components within defense-unique systems, erodes its ability to secure the detailed, proprietary IP needed for organic or competitive support to that defense system throughout its lifecycle. Defense systems are often complex systems of systems, with each system further decomposed into subsystems, subsystems decomposed to components, and so on. The supporting IP model for commercial or non-developmental (i.e., that the customer will not receive detailed IP deliverables or the license rights to use or release that commercial IP for competition with the IP owner) puts the government at greater risk of becoming vendor-locked for critical sub-elements of these complex systems. If a component or subsystem becomes vendor-locked, the process for acquiring, supporting, and upgrading the overarching system or subsystem can be subject to the pressure of that vendor lock, because the overall support for that system depends on the exclusive IP rights governing a critical subsystem or component.

Gaining Leverage over Vendor Lock to Improve Acquisition Performance and Cost Efficiencies; The MITRE Corporation; https://www.mitre.org/sites/default/files/publications/gaining-leverage-over-vendor-lock-14-1262.pdf

The term “vendor lock” describes the situation in which customers depend on a single manufacturer or supplier for some product (i.e., a good or service), and cannot shift to another vendor without incurring substantial costs or inconvenience. This can grant the vendor what amounts to monopoly power and thus creates the opportunity for the vendor to earn far greater profits than it could in the absence of such dependence.1 Vendor lock frees vendors to establish noncompetitive prices, since they have become in effect the “sole source” of a given product or service. Admittedly, some of the downside of vendor lock may be offset by savings resulting from 1) shorter learning curves, 2) development costs absorbed by the vendor because of the advantage of controlling a large business base, and 3) investment costs for commercial technologies and derivative product lines that can benefit military products. However, those savings can be minor compared to the typical cost growth associated with single-source acquisition programs. A recent GAO report revealed that the average acquisition for a major Defense weapons system experienced a 38% cost growth from original estimates and a 27-month schedule overrun2. Vendor lock often rests on proprietary data and supposed intellectual property (IP) rights; it may also result from standards controlled by the vendor. Recently the Government made significant changes to U.S. Federal Statute relative to IP rights: the Government may now challenge restrictions placed on the IP by the vendor.3 Previously, vendors simply declared ownership, forcing the government to disprove the allegations. This change in the law may be vital to breaking or mitigating vendor lock in the future.4 Recently, the Air Force released their Sixth Edition of the Technical Data and Computer Software Rights Handbook for Acquisition Professionals, March 2014, where they emphasized the value of owning technical data rights: “Specifically, if program office personnel do not acquire sufficient rights in technical data and computer software prior to award, they may relinquish the opportunity to enhance competition and preserve core logistics capabilities as required by 10 U.S.C. §§ 2464 and 2466. If the Government relinquishes that opportunity prior to award, the a Program Office will lock itself into a position where the incumbent can force it to pay an exorbitant price years or decades hence to be able to use, release or disclose that technical data or computer software to individuals outside the Government. Of course, that assumes the incumbent is willing to sell the Program Office a license to use, release or disclose that technical data or computer software to individuals other than Government employees at any price.5” Avoiding vendor lock or minimizing its effects is consistent with ensuring affordability in military systems, as directed by the Under Secretary of Defense for Acquisition, Technology and Logistics (USD AT&L) Memorandum of September 14, 2010, “Better Buying Power” (BBP). There are several considerations which can drive affordability and mitigate or control the impact of vendor lock. These considerations, with specific emphasis on owning IP and continually introducing competition into the process, are address in this paper.

Editorial Director of Air & Space Forces Magazine, with more than 25 years at the publication and more than 34 years in defense journalism; New Pentagon Report Raises Alarm Over Industry Consolidation, Future of Competition; Air & Space Forces Magazine; https://www.airandspaceforces.com/new-pentagon-report-raises-alarm-over-industry-consolidation-future-of-competition/

The Defense Department faces a future of high-price, sole-source contracts, reduced innovation, and possible critical shortages if it doesn’t take steps to increase competition and the number of suppliers in the defense industrial base, according to a new Pentagon report. But changing the conditions creating the situation won’t be easy, it said. To prevent these issues, the U.S. must limit further defense industry consolidation; fix intellectual property issues; attract new businesses to the industry—especially small businesses—and put “sector-specific supply chain resiliency plans” into effect for critical items, ranging from missiles to castings, strategic metals, and microelectronics, according to the report, released Feb. 15. The DOD noted that, since the 1990s, defense and aerospace primes have dwindled from 51 companies to just five mega-companies and that further consolidation “would have serious consequences for national security.” Over the last 30 years, for example, “tactical missile suppliers have declined from 13 to three, fixed-wing aircraft suppliers declined from eight to three, and satellite suppliers have halved from eight to four. Today, 90 percent of missiles come from three sources,” the Pentagon said. Reduced competition and fewer suppliers “may leave gaps” in filling defense needs and “remove pressures to innovate to outpace other firms.” The taxpayer will suffer, as “leading firms leverage their market position to charge more, and raise barriers for new entrants,” the Pentagon said. Single-point dependencies are also a strategic vulnerability if the supply chain is broken or a sole-source is “influenced by an adversary nation,” states the report.

Editorial Director of Air & Space Forces Magazine, with more than 25 years at the publication and more than 34 years in defense journalism; New Pentagon Report Raises Alarm Over Industry Consolidation, Future of Competition; Air & Space Forces Magazine; https://www.airandspaceforces.com/new-pentagon-report-raises-alarm-over-industry-consolidation-future-of-competition/

The Pentagon touted a number of initiatives to attract new entrants, and particularly small businesses, saying it sees opportunities to draw in many companies if it can convince them that it’s reducing red tape and can offer stable timetables for competitions, awards, and production contracts. Intellectual property has been a sticking point in recent years. The Pentagon wants to own as much of the technical baseline for new programs as it can get, which in turn would promote competition for upgrades under an “open mission systems” or “open architecture” approach. Doing so helps prevent “‘vendor lock” and “other undesirable results.” But in the report, it admitted that this policy deters some companies from doing defense work. The National Defense Industrial Association, in its annual “Vital Signs” report on the health of the industry, released Feb. 2, cited the IP issue as one of the key issues deterring companies from doing defense work; the others being red tape and unreliable long-term funding. To address the problem, the Pentagon said it will adopt “best practices” from the commercial world to deal with IP needs “early in the competitive phases of the acquisition process.” It will be an “evaluation factor” in competitive contracts and a “negotiation objective” in sole-source awards. Although it will favor those willing to sell the government IP, the Pentagon will create “procedures that do not result in unnecessary anticompetitive consequences.”

We have new processes to incentivize and accelerate promising joint capabilities and experiments to advance those operational concepts — shrinking their time crossing the valleys of death by as much as two years. To bridge the lab-to-prototype and prototype-to-scale valleys of death, we're using more flexible acquisition pathways for rapid prototyping, rapid fielding, and software development. Over $35 billion have gone through these pathways since 2021, across nearly 200 programs. They've shaved up to six years off transition and delivery timelines for warfighter priorities. To work better with commercial and non-traditional firms, we're embracing innovative contracting tools that can be easier for them to navigate. We also sped how we transition the most promising capabilities to scale, by overcoming bureaucratic and cultural barriers that slow us down. We knew all that was necessary because of our work to map and then methodically debug the whole DoD innovation ecosystem — a nose-to-grindstone effort that, like software development, never ends. As one of the world's largest organizations, we must always look for ways to get out of our own way. Beyond that, we issued data decrees that all DoD data must comply with, because data interoperability, access, and trustworthiness are critical for AI, for doing command and control across all domains, and for being a modern Defense Department. No excuses. We also affirmed ethical AI principles; updated our decade-old, but still world-leading policy on responsible use of autonomous weapon systems; and issued new strategies and implementation plans on data, analytics, AI adoption, and responsible AI. Simultaneously, we focused on talent and personnel — from the ADA initiative that deploys data scientists to every combatant command, to continuously upskilling our acquisition workforce. We also brought focused leadership to critical organizations, and stood up new ones: We elevated the Defense Innovation Unit to report directly to the Secretary, so it can help focus and accelerate how we leverage the best of commercially-derived tech. DIU is now led by a former direct report to Apple's CEO. We integrated disparate digital, AI, and data analytics teams under an empowered Chief Digital and Artificial Intelligence Officer, who previously ran machine learning at Lyft. He also reports directly to Secretary Austin. And we created the Office of Strategic Capital, to partner with private-sector — excuse me, private-capital markets — and catalyze investment in technologies critical to national security. Across the board, we're making smart, serious investments.

Gregory Wischer is principal at Dei Gratia Minerals, a critical minerals consultancy. He has written about critical mineral issues in Newsweek, RealClearMarkets, RealClearEnergy, National Defense Magazine, Washington Times, The National Interest, 19FortyFive, the Wilson Center’s New Security Beat, and the Australian Strategic Policy Institute’s The Strategist. Jack Little is an independent critical minerals and rare earths analyst. He has been published in the Wall Street Journal and the Idaho State Journal THE U.S. GOVERNMENT SHOULD STOCKPILE MORE CRITICAL MINERALS; War On The Rocks; https://warontherocks.com/2023/09/the-u-s-government-should-stockpile-more-critical-minerals/

In a hypothetical conflict, the U.S. military would use platforms and munitions that contain substantial critical minerals. For example, in a 2013 report, the Department of Defense said that one Virginia-class submarine requires 9,200 pounds of rare earth elements and that one Aegis destroyer requires 5,200 pounds of rare earth elements. The attrition of these platforms, munitions, and the critical minerals that constitute them would require replenishment during a conflict. The duration and intensity of the hypothetical conflict should determine whether to prioritize replenishing platforms or munitions and thus which critical minerals to stockpile and to what extent. To illustrate, in a short, intense war, replenishing munitions will take priority as new platforms will not be built and fielded in time for combat; consequently, replenishing antimony in artillery and cruise missiles would be more important than replenishing rare earth elements in submarines and destroyers. The U.S. military would also have to replenish other technologies enabled by critical minerals, like gallium in semiconductors and lanthanum in night vision goggles. Despite the high attrition of platforms, munitions, and critical minerals in a potential U.S.-Chinese conflict, the value of materials in the National Defense Stockpile has fallen 98 percent from $42 billion in 1952 to $888 million in 2021. While the 1952 National Defense Stockpile likely prepared for a global nuclear conflict with the Soviet Union and the 2021 National Defense Stockpile likely prepares for a limited localized conflict with the Chinese military, the National Defense Stockpile today only requires 2 percent of the Cold War–era stockpile seems low, especially given limited non-Chinese mineral suppliers and high American mineral demand in a potential conflict. Furthermore, mineral stocks in the U.S. stockpile are far less than minerals in China’s strategic reserves. China has an estimated 7,000 metric tons of cobalt in its strategic reserves, while the U.S. National Defense Stockpile contains just over 300 metric tons — down from over 24,000 metric tons in 1990. Given its low mineral stocks, the National Defense Stockpile model may underestimate the duration and intensity of a U.S.-Chinese conflict, underestimating U.S. mineral demand, and it may also overestimate U.S. access to domestic and foreign minerals, overestimating U.S. mineral supply. The National Defense Stockpile model may underestimate the duration of a U.S.-Chinese conflict, thus underestimating the critical mineral stocks needed in the stockpile. Hal Brands and Michael Beckley of the American Enterprise Institute write, “The Pentagon and many defense planners appear to be focused on winning a short, localized conflict in the Taiwan Strait.” They warn, “If Washington doesn’t start preparing to wage, and then end, a protracted conflict now, it could face catastrophe once the shooting starts.” Similarly, a RAND report on a potential conflict cautions, “Underestimating the duration of conflict was a significant factor in most major strategic blunders of modern times.” John Culver, senior fellow at the Atlantic Council, believes a possible conflict could last from years to decades, which would require immense volumes of critical minerals. The National Defense Stockpile model may also underestimate the rapid attrition of minerals in the war effort. As the Russo-Ukrainian War has shown, high-intensity conflict reduces stockpiles more quickly than they can be replenished. This mismatch is even more stark with minerals: downstream factories might be retrofitted in months or built in two years to accommodate demand, but upstream mines can take at least five years to produce, while metal refineries can take at least two years to build and at least one year to ramp up to capacity. If the National Defense Stockpile model assumes the hypothetical U.S.-Chinese conflict will be moderately intense or that mineral production can quickly come online, the National Defense Stockpile risks having too few minerals to support a high-intensity war effort.

Macdonald Amoah, Gregory Wischer, Juliet Akamboe and Morgan Bazilian | 11.10.23; Macdonald Amoah is a researcher at the Payne Institute for Public Policy at the Colorado School of Mines. Gregory Wischer is principal at Dei Gratia Minerals, a critical minerals consultancy. Juliet Akamboe is a critical minerals demand researcher at the Colorado School of Mines. Morgan Bazilian is director of the Payne Institute and Professor of Public Policy at the Colorado School of Mines.; WHAT IF AMERICA’S MINERAL-INTENSIVE MILITARY RUNS OUT OF MINERALS?; https://mwi.westpoint.edu/what-if-americas-mineral-intensive-military-runs-out-of-minerals/

Today, minerals still undergird warfighting technology, including defense platforms and munitions. Virtually every US military system requires mineral components, from steel and titanium to graphite composites and cadmium alloys. Global defense spending shows that military demand is increasing for these platforms, munitions, and thus minerals. Like previous junctions in human history, the current period will be defined by minerals and the warfighting technology that they enable. US military demand for minerals is expected to grow against a backdrop of rising US-China competition and the prospect of a US-China war in Asia. However, US mineral supply chains presently rely heavily on China, which can restrict supply to the United States, and Asian countries like Japan and South Korea, whose sea lines of communication to the United States would be disrupted in a US-China conflict. Importantly, the Russia-Ukraine war has shown that attrition rates for this war materiel in a conflict often outpace replenishment rates. In short, future US access to adequate supplies of warfighting-enabling minerals is endangered. To reduce this mineral vulnerability, the US government could stockpile more minerals, source these minerals from domestic mines and refineries, and provide grants to existing refineries to process byproducts that are currently not processed.

Macdonald Amoah, Gregory Wischer, Juliet Akamboe and Morgan Bazilian | 11.10.23; Macdonald Amoah is a researcher at the Payne Institute for Public Policy at the Colorado School of Mines. Gregory Wischer is principal at Dei Gratia Minerals, a critical minerals consultancy. Juliet Akamboe is a critical minerals demand researcher at the Colorado School of Mines. Morgan Bazilian is director of the Payne Institute and Professor of Public Policy at the Colorado School of Mines.; WHAT IF AMERICA’S MINERAL-INTENSIVE MILITARY RUNS OUT OF MINERALS?; https://mwi.westpoint.edu/what-if-americas-mineral-intensive-military-runs-out-of-minerals/

Minerals undergird warfighting technology, just like they have during past ages. However, as tensions—and the prospect of war—rise with China, the US military is vulnerable, relying heavily on foreign sources of minerals for its defense platforms and munitions. In a protracted, high-intensity conflict with China, the US defense industrial base may lack sufficient minerals to support the war effort. The US military will remain vulnerable—and may risk defeat in a potential US-China conflict—if the Department of Defense fails to bolster its stockpile and grow domestic mineral production. Like previous junctions in human history, the current period of US-China competition will be defined by minerals and the warfighting technology that they enable.

Gregory Wischer is principal at Dei Gratia Minerals, a critical minerals consultancy. He has written about critical mineral issues in Newsweek, RealClearMarkets, RealClearEnergy, National Defense Magazine, Washington Times, The National Interest, 19FortyFive, the Wilson Center’s New Security Beat, and the Australian Strategic Policy Institute’s The Strategist.

Jack Little is an independent critical minerals and rare earths analyst. He has been published in the Wall Street Journal and the Idaho State Journal

If logistics wins or loses wars, what wins or loses logistics? U.S. military doctrine has the answer: “The U.S. military supply chain (to include the defense industrial base) represents a major competitive advantage that underpins deterrence and allows the United States to project power.” Despite being established in doctrine, it took a global pandemic for the Department of Defense to take notice of the fragility of its supply chains and the full impact of China’s global economic expansion. However, acknowledging vulnerability, understanding it, and doing something about it are not mutually inclusive. While awareness in the Department of Defense is rising, the lack of visibility into defense supply chains makes easy targets for adversaries seeking to insert undetected risks into supply chains — silently biding time until they choose to exploit them. It is difficult to fix what you can’t see. It is time for the Department of Defense to take bold steps to gain full visibility into defense supply chains to help mitigate the risk of acquiring U.S. equipment from foreign adversaries and/or shoddy suppliers.¶ Supply chains underpin the global market. Every product has a network of interconnected companies that must come together at the right time and place to deliver a timely product. The more complex the product, the more nodes the network has. Each node has its own material, logistics, personnel, processes and stakeholder challenges. A disruption in one node will sweep quickly throughout the entire system and upend the supply chain.¶ The military supply chain is a complex system comprised of a network of suppliers, expanding beyond the known large defense contractors out to thousands of low-tier suppliers. Each tier of the network is critical to the success of the tiers above and below it. Within these networks, there are nexus suppliers critical to the success of the entire system. We argue that it is not too hard and not too expensive to gain full visibility over all of these supply chain nodes. To do so, the Department of Defense should capitalize on proven commercial supply chain software suites, work with Congress to set visibility mandates and reimagine its approach to supply chain management in the 21st century.¶ The Department of Defense’s Supply Chain Crisis¶ The Department of Defense has an incentive to map and fully understand its supply chain — and the suppliers that support it. It is currently facing two issues. The first, and most critical, is that the department does not know who provides parts for suppliers below a certain supplier threshold. An example from the private sector is illustrative of the supply chain and its nodes. The Center for Advanced Purchasing Studies mapped the American Honda Motor Company’s supply network. The supply chain included 10,832 suppliers: 245 first tier, 1,643 second tier, 4,605 third tier and 4,330 fourth tier. For Honda, over 97 percent of its suppliers were below tier one. This is the level of supplier visibility the Department of Defense admitted it was unable to attain in a 2022 report to the president.¶ The second challenge is that the suppliers the Department of Defense depends on may be clustered together in similar geographic regions. This makes them vulnerable to “kill shots,” a metaphor used for military targets that, if attacked, can render an adversary crippled and unable to respond. For example, the Living Supply Chain, a 2017 book on supply chain management written by Robert Handfield and Tom Linton, offers an illustration. Elementum mapped a client’s revenue streams to supplier locations, determining that 86 percent of the company’s revenues were tied to suppliers in one small geographic area. A single major disaster could ultimately impact 86 percent of the company’s revenues. Imagine if a similar geographic risk resides within the U.S. defense supply chain and how the clustering of a vital industry makes the United States vulnerable to attack.¶ The 2022 National Defense Strategy directs the Department of Defense to “fortify the defense industrial base, logistical systems, and relevant global supply chains” in response to the observed rise in supply chain impacts. For example, COVID-19-related supply chain disruptions caused delays in 48 major defense acquisition programs. Of those, 22 programs continue to experience delays, suggesting that things have not improved even as COVID-19-related concerns have subsided.¶ The U.S. Air Force’s acquisition chief has said: “Ongoing supply chain issues affecting subcontractors [sic] were largely responsible for the more than year-and-a-half delay” to the KC-46’s remote vision system. And the U.S. Navy’s Columbia-class submarine is already struggling to meet current program demands, highlighting that the “supply chain is the number 1 risk.” Beyond delays, the lack of visibility into all elements of the supply chain prevents the Department of Defense from identifying disruptions early — and planning for them proactively.¶ The second, and ongoing concern, is about quality control. There is a real risk of inferior or counterfeit components being injected into the Department of Defense’s supply chain. In June 2020, 1st Lt. David Schmitz was killed in an F-16 accident. In a related federal civil lawsuit, it was revealed that the Air Force identified several transistors and microchips that failed. The lawsuit alleges some of these components were counterfeit. Separately, in 2022, the Department of Justice filed criminal charges against an individual for selling approximately $1 billion of Chinese-made counterfeit Cisco components to companies within the United States and an undisclosed list of government agencies, including the Department of Defense.¶ Supply Chain Risk Management: The Department of Defense’s History of Neglect¶ Unfortunately, the fragility of the Department of Defense’s supply chain is not a new issue. Over five years ago, a Government Accountability Office report highlighted that the information required to effectively manage supply chain risks within the defense sector was lacking. In response to this report, the Department of Defense “completed a detailed assessment of key sectors … and identified major risks … and included discussion of gaps or vulnerabilities and mitigation strategies.” However, the growing trend of supply chain disruptions suggests the Department of Defense’s mitigation steps were either never fully implemented or that they have failed to mitigate the problems.¶ The F-35’s supply chain is a good example. The United States is 100 percent import-reliant on 16 minerals deemed “critical” to national security. China accounts for “63 percent of the world’s rare earth mining, 85 percent of rare earth processing, and 92 percent of rare earth magnet production.” Yet, it still took the Department of Defense 12 years to recognize “every one of the more than 825 F-35[s] … delivered contains a component made with a Chinese alloy that is prohibited by both U.S. law and Pentagon regulations.” To address this lack of visibility, President Biden issued an executive order directing the Department of Defense to “submit a report identifying risks in the supply chain [sic] and policy recommendations to address these risks.” In response, the department admitted it had limited visibility, stating it “[does] not track these vulnerabilities … As supply chains have become more global in scale, prime contractors have lost some visibility into the sub-tiers of their supply chains, especially below third-tier levels.” The Department of Defense is currently reviewing these impacts. If history repeats, the department might see measurable progress in about 10 years.¶ Supply Chain Risk Management: A Tale of Two Industries¶ Supply chain risk management is not unique to the defense sector and the need for speed, agility and resilience is just as critical to profit margins as it is to national security. While private industry has evolved, the Department of Defense continues to view it through a very logistics-focused lens. Decades ago, industry began consolidating responsibility for the end-to-end value stream, establishing senior managerial positions for procurement and supply officers. In contrast, the Department of Defense continues to silo its functions of procurement, logistics, and operations. Each functional area assesses its lens of supply chain risk (e.g., cyber, acquisition, logistics, etc.), but no one organization is considering the inherent collective risks to the entire defense industrial base.¶ Private industry has also embraced the importance of proactive supply chain risk management and integrated it as a critical part of operations. Handfield and Linton offer that global supply chains are living systems “subject to biological rules.” And rule number one is that firms survive by adapting to changes in the ecosystem by “embracing real-time data, velocity, transparency, and rapid response.” Certain firms utilize commercial software solutions using big data, AI and machine learning to map supply chains. Others have implemented flow-down requirements mandating the use of commercial software solutions that rely on data directly from suppliers to create verified supply chain maps. In both cases, many then employ additional software to conduct real-time monitoring of the mapped network using publicly available information. Everstream, Resilinc, Craft, BlueVoyant, Deloitte CentralSight and many more offer software solutions in this space. Becton Dickenson, one of the world’s largest medical technology firms, utilized Everstream to map a product line in three days with over 90 percent accuracy. Previous internal attempts took Becton Dickenson four years to accomplish. Using Resilinc’s software to build a validated supplier map, IBM received real-time supplier updates during the COVID-19 pandemic. This allowed IBM to proactively mitigate issues, resulting in zero missed product deliveries due to pandemic-related disruptions.¶ Despite the leaps made in the commercial sector, the defense sector has barely taken its first steps toward gaining real visibility into its supply chains. It has been over a year since the Department of Defense said it would apply analytical tools to identify vulnerabilities. To date, nothing of significant value has been fielded. The organic solutions being explored are not only costly but also directly conflict with the department’s own call to action to “act as a fast-follower” with regard to commercial technologies.¶ Recommendation and Conclusion¶ U.S. national security relies on the strength and resilience of its defense supply chains, and failing to understand their limits will be catastrophic in conflict with a near-peer adversary. The Russian invasion of Ukraine has already resulted in the United States struggling to meet munition needs for Ukrainian forces for a regionalized conflict. In the Pacific, the United States faces a $19-billion backlog of planned weapon transfers to the Taiwanese military, while delaying 66 new F-16V aircraft deliveries due to supply chain disruptions. In Taiwan Strait conflict wargames, the Center for Strategic and International Studies determined that “the United States would likely run out of some munitions — such as long-range, precision-guided munitions — in less than one week.” The report also stated: “The U.S. defense industrial base is not adequately prepared for the international security environment that now exists.”¶ This stark performance and assessment of the U.S. industrial base should alarm policymakers in the Department of Defense and Congress. While there is growing awareness of this crisis within the Pentagon, it appears the Department is trending toward historical patterns of organizational change versus accountability. Dr. William LaPlante, the Department of Defense’s top procurement official, issued a memo in March 2023 establishing a Joint Production Accelerator Cell. It will be responsible for “building enduring industrial production capacity, resiliency, and surge capability for key defense weapon systems and supplies.” This initiative calls into question the broader effectiveness of the Department of Defense’s existing Industrial Base Policy office and should be a pause for strategic reflection. Why create a new organization when the Department of Defense has an established office already charged with sustaining “a robust, secure, and resilient industrial base”?¶ To drive more enduring impacts in fortifying the defense industrial base, the Department of Defense should first understand the scope of the problem it is trying to fix. We recommend the Department of Defense immediately execute an experimentation plan to test widely available commercial supply chain visibility solutions and select a common suite for the department. The Department of Defense should avoid replicating commercial applications, seeing that previous attempts by the department struggled to reach the field or later were scrapped after spending millions of dollars. Custom solutions also fail to leverage proven commercial applications already deployed at scale. Additionally, a common suite ensures the department is able to gain visibility across programs. Allowing each program to address supply chain visibility individually will answer program-specific questions, but it will not answer the broader question of the “kill shots” within the defense industrial base.¶ The Department of Defense should also work with Congress to implement visibility mandates for industry. This mandate should include a standard of visibility and government data access for all government contractors to give the Department of Defense the authority to hold industry accountable for supply chain risk management. This legislation already exists for rare earth elements for permanent magnets (10 U.S. Code § 857) and sensitive materials from non-allied foreign nations (10 U.S. Code § 4872). To imply the government is not able to gain visibility due to contract or cost constraints neglects to acknowledge the myriad standards the government already levies on industry. National security depends on resilient supply chains and visibility is the first step in fortifying them.¶ More broadly, the Pentagon should reconsider how it thinks about supply chain management. The majority of the focus on supply chain management and supply chain risk management is through the lens of logistics. This approach completely ignores what is happening in the supply chains as a system is in development or production. Too often, Department of Defense program offices relegate weapon system supply chain monitoring and oversight to logistics or to the contractor, often with little oversight or attention from program leadership until there is a problem. This is a dated approach. Supply chains impact almost every aspect of a system. The risk exposure to the defense ecosystem from horizontal integration and global diversification remains unknown.¶ Therefore, supply chain accountability must garner proactive attention from the earliest stages of weapon system development. For example, the full network of suppliers should be evaluated by the Department of Defense prior to codifying a weapon system design. The acquisition community must reimagine how “cost, schedule, performance” is defined. Rather than focus on obligation rates and updating baselines to bring programs back on schedule, program leaders must recognize the integrated impacts of the supply chain to all three areas if they are to remain relevant in the 21st century.¶ It is time for the Department of Defense to act swiftly. The CIA has said they are aware of Chinese intentions: General Secretary Xi Jinping told his army to “be ready by 2027” to invade Taiwan. One thing is certain today: Department of Defense supply chains lack the resiliency for a large-scale protracted conflict and they are not on track to be better positioned in 2027. The Department of Defense’s approach toward strengthening the defense industrial base and securing its supply chains is failing to move at the speed of relevance. As many Department of Defense leaders remain hyper-focused on exquisite technology, they should not forget that “none of this technical overmatch matters if America can’t build enough of it, sustain it, or get it to the fight in the first place.” Defense supply chains are under assault and the United States is losing. It is time for the Department of Defense to stop the studies and take immediate and real action to identify “kill shots” at risk for exploitation. Supply chain visibility across the defense industrial base is foundational for national security, and it requires a united implementation strategy.

Vital Signs 2024: U.S. Defense Industrial Base Still Facing Headwinds; National Defense- NDIA’s Business and Technology Magazine;

The present U.S. defense industrial base reflects a premium policy­makers placed on just-in-time supply chains and lowest-cost technically acceptable contract awards. It also reflects outdated assumptions regarding workforce availability. It is a system built for convenience and predictability, and it is an industrial base the U.S. government resourced for low-intensity conflict. To foundationally transform the defense industrial base, the government and the private sector must embrace a synergistic partnership and disruptive thinking. In 1940, then-Chief of Staff of the Army Gen. George Marshall wrote: “For almost 20 years we had all the time and almost none of the money; today we have all the money and no time.” Simply put, time, funding and consistency are immutable factors for both military readiness and defense industrial readiness. The National Defense Industrial Association’s “Vital Signs” report series is designed to track the progress made across the five strategic pillars required for a strong, diverse, resilient and ready defense industrial base in an era of strategic competition. The five pillars are: securing budget stability and sufficiency; advancing Defense Department digital modernization and transformation; facilitating foreign military sales modernization and technology integration with allies and partners; restoring industrial readiness, capacity and infrastructure; and enabling more resilient supply chains. In “Vital Signs 2023,” NDIA noted 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 service-based economy with a premium on just-in-time commercial supply chains. The report also noted that for the last 30 years, on a bipartisan basis, the U.S. government failed to resource the industrial footprint required to prevail in near-peer conflict.

Michael E. O’Hanlon; Director of Research - Foreign Policy, Director - Strobe Talbott Center for Security, Strategy, and Technology, Co-Director - Africa Security Initiative, Senior Fellow - Foreign Policy, Strobe Talbott Center for Security, Strategy, and Technology, Philip H. Knight Chair in Defense and Strategy

Alejandra Rocha; Senior Research Assistant - Strobe Talbott Center for Security, Strategy, and Technology

[Jared, Jared Jared Serbu is deputy editor of Federal News Network and reports on the Defense Department’s contracting, legislative, workforce and IT issues.; February 10, 2023; “Defense Industrial Base loses thousands more firms, mainly because DoD is a tough customer”; Federal News Network;

The Defense Industrial Base is still quite vast, but it’s steadily shrinking. The latest edition of an annual report by the National Defense Industrial Association suggests that even though thousands of new companies are winning their first-ever DoD contracts each year, those new entrants aren’t nearly enough to offset the number of firms who are leaving the Defense market. The latest figures NDIA compiled show the Defense market suffered a net loss of 3,300 companies in fiscal year 2021, the latest statistics available. Although more than 8,300 firms sold goods and services to DoD customers for the first time in 2021, even more left the Defense space. The industrial base has been declining every year since 2017, from 76,700 companies in that year to just under 60,000 in 2021. David Norquist, NDIA’s president, said the latest declines don’t appear to be driven by industry consolidation, but by companies simply deciding not to do business with DoD. “What you’ve seen mostly in the more recent time is a drop in firms who are willing to enter the Defense Industrial Base, or firms who are already here leaving,” Norquist, a former deputy secretary of Defense said during testimony Wednesday before the House Armed Services Committee. “For the smaller firms, the ones you’re trying to grow and get to come in, what are the barriers that we are putting in their way? Why are people not staying, and how do we draw people in? Because that’s the best way to sustain competition.” According NDIA’s survey of its members, 42% now say they’re the government’s only supplier for at least some of the products they sell. And of the companies who are selling to DoD, 66% said dealing with the department is “very difficult” or “somewhat difficult.” For comparison’s sake, only 9% of the same companies characterized their private sector customers that way. The biggest challenge is the bureaucracy of the DoD acquisition process, according to 30% of the respondents. “We’re poised for peace in terms of our processes, how we invest, and we’ve got to move dramatically away from that to a sense of urgency,” Eric Fanning, the president and CEO of the Aerospace Industries Association said during Wednesday’s hearing. “Our foreign military sales (FMS) process is a good example of that. When we transition from giving things to Ukraine to selling things to Ukraine, it’s going to grind down to a very slow process in the FMS system. I think there are a number of things we have to do to streamline the process, and it’s really going to take dedicated senior leader attention.” In NDIA’s survey, another 22% of companies said the lack of stability in the federal budget is their biggest challenge. Fanning, a former secretary of the Army, said the regularity of continuing resolutions in every appropriations cycle is a particular problem. “Over the last 25 years, Congress has passed more than 120 continuing resolutions instead of on-time appropriations bills, and we are still digging out from the effects of sequestration a decade ago,” he said. “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 … 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.” Inflation is also a major issue for companies; 11% said it was their biggest single concern. And while it’s a problem across the broader economy too, it can be especially challenging in certain government contracts, like in the case of multi-year firm-fixed price agreements that companies agreed to before inflation became a major consideration. “The absence of economic price adjustments in existing contracts is a real challenge for some of the small businesses I’ve talked to, because often the government will award a five year contract where, since there wasn’t much inflation, the out-years only went up by 2% a year,” Norquist said. “They know that they can’t keep those employees with only 2% raises going forward. On new contracts, they can get awarded , but those old ones really put them in a bind and risk losing their workforce.” And companies say broader workforce challenges are an even bigger issue than inflation. In NDIA’s survey, 23% of companies said finding and retaining talent is their single biggest challenge. Industry representatives say many of the other problems companies face in the Defense market also play into their workforce challenges. Uncertain budgets, for example, make it difficult to know how many people they need to hire and train. Predictability is especially important in capital and labor-intensive portions of the Defense sector, like building and maintaining ships, said Matthew Paxton, the president of the Shipbuilders Council of America. “Ship maintenance and modernization goes through a lot of ups and downs,” he said. “When we try to get somebody in our trades, they go through our apprenticeship programs to become a machinist or electrician or a welder, and they have a sense of belonging. But then companies have to let some of that workforce go because work flows don’t come into the home port like they were predicted. That tradesman was going to be a project manager or a supervisor, but it takes about five to eight years for that to happen. A lot of the guys in our shipyards are generational; they’ve had a mother or father that’s worked there, and they want a career. But when we have instability in the work forecasts, it creates real disruption with that workforce and the supply chains.”